Global Weekly: The end of negative earnings revisions?

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After several months of negative earnings revisions, analysts are starting to become a bit more positive on US company earnings. Still, downward revisions exceed upward revisions, but the momentum of the ratio between upward and downward revisions is turning positive again for the US, while it is stabilising for the rest of the world. Nevertheless, the S&P 500 Index is struggling to climb above the level of 2800. The US stock index moved slightly lower this week.

This week’s macroeconomic news was dominated by China. On Tuesday, China lowered the target for its 2019 gross domestic product to 6.0%-6.5% from a previous “about 6.5%”. Shifting away from a point figure to a range gives policymakers some room to manoeuvre. Additionally, premier Li Keqiang announced tax cuts worth CNY 2 trillion (USD 298 billion) to stimulate the economy. The Chinese stock market continued its upward trend this week. Chinese A-shares appreciated by 33% (measured by the CSI 300 Index in euro terms) year-to-date already.

The rise of the oil price came to a halt on Tuesday, after crude oil inventory figures had risen and Exxon Mobil and Chevron announced plans to increase output from the Permian Basin by about 2 million barrels per day by 2024. As a result, the energy sector suffered on Wednesday.

Mining company Barrick Gold this week made an offer to acquire competitor Newmont Mining, which was rejected by the latter since Barrick Gold did not offer any premium to the current stock price. Newmont Mining instead proposed a joint venture for their respective Nevada operations. Thus, consolidation within the sector appears to continue after the latest mergers between Barrick Gold and Randgold as well as between Newmont Mining and Goldcorp.

Bonds – Are banks still on shaky ground?

The European Central Bank (ECB) on Thursday announced it will introduce a new round of Targeted Longer-Term Refinancing Operations (TLTROs). Why is the news that the ECB will release another round of TLTROs important? Over the period 2014-2017, these TLTROs – which are loans provided to banks by the ECB – were distributed to banks with the intention to encourage lending to companies and households. This would benefit the economy, as looser credit standards stimulate growth. Banks themselves are still in the process of strengthening their balance sheets and improving the credit quality of their loan portfolios.

Next year, banks will need to start planning how the so-called net stable funding ratio standard (NSFR; part of Basel III regulations) is going to impact their financing needs from then onwards. This NSFR determines the types of liquidity banks must hold to justify the risks they take. Banks will not have to repay the first TLTROs until 2020. Under NSFR requirements, however, funding that needs to be repaid within one year does not count as bank liquidity anymore. Therefore, banks would have had to start refinancing their TLTROs as early as June 2019 – this would have posed a challenge for certain banks, if the ECB would not have announced another round of TLTROs on Thursday. Already last year, banks working together with the ECB concluded that replacing the TLTROs would be problematic for the weakest banks as they used the TLTRO facility the most. Even in a scenario where growth and inflation would have been higher than today, weaker banks would have faced difficulties in securing their funding needs without TLTROs.

Due to the introduction of TLTROs, the interdependency of banks has also decreased. This is positive, as it could help mitigating the impact of stress situations such as a government debt crisis. If a government debt crisis were to occur in an EU country, this would put stress on its local banks that buy government debt. Consequences for other EU states, however, would no longer be as grave as before, because their banks would be less impacted by it. The ECB had a difficult message to bring across on Thursday: the central bank had to lower its growth outlook without scaring markets. At the same time, these lower growth expectations represented a justification for introducing a new round of TLTROs. For now, we conclude that this new round of TLTROs will be positive for risk sentiment. Corporate bonds should profit from this, as well as peripheral government bonds.

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