Asia week ahead - US-China trade talks, US earnings

A week that commenced with growth concerns fizzled into consolidation, beholding the event risks to come.

What we have to watch next week are ones that would very likely provide us with further directions as to where global equity markets are headed.

US-China talks: Deal or no deal?

The most prominent event to watch in the coming week would be the second round of trade talks between US and China in Washington. Expected to be held over January 30-31, this round of talks extends from the first in Beijing where positive but vague statements had been issued at the end of the meeting from both sides. Other than the apparent eagerness to see a deal being established, the state of relations appears to have been little changed since. The latest update from US commerce secretary Wilbur Ross had outlined the two sides being ‘miles and miles’ away from resolving the trade war with many issues complicating matters. This comes after news that US had cancelled preparatory talks with China over intellectual property rules and China’s reforms issues, items that sit at the core of this trade dispute, though this news had later been disputed.

Although the clock is ticking on the talks, it is unlikely that the market would sink on the lack of a deal this round, in light of the distance to the hard deadline set on March 1. Progress, however, would remain something that the market craves for particularly on the difficult issues outlined above. The posturing ahead of the talks had made it hard to discern the flavour that the talks would take, thus seeing the corresponding indecisiveness within markets this week. Watch for where the conclusions would guide markets as the jury is still out on whether the bulls or bears are in control of the equity market.

Wave of earnings

Following the slew of US bank earnings, we have seen a more assorted set this week bringing the total release to 21% of the S&P 500 Index. Of which, 75% had beat the earnings forecasts, though only a mere 59% had done so for revenue according to Refinitiv data. As we move towards the heart of the earnings season, an approximate 13% are expected to report in the following week. This will feature a number of FANGs stocks including Facebook Inc. and Apple Inc. (preview here) that could provide the wider market with stronger impetus for moves.

Interestingly, the takeaway from the earnings season thus far had been one of relief rallies whereby a beat in forecasts and a better 2019 outlook became the recipe for post-earnings gains. Facebook and Apple had been among which that saw poor guidance for their December quarter, expectations that had since been priced in. One should note how the outlook will be positioned for an indication on the post-release reaction, where the bias sits to the upside based on the performance of the earnings season thus far.

Growth check – US payrolls, China PMI, US GDP?

Running alongside the blockbuster events highlighted above would be the release of a slew of economic indicators with the turn of the month, and mind if I highlight this would also mean month end trading.

While the fate of the US GDP release hangs on the line as the US government shutdown enters its 35th day this Friday, the labour market update would appear as scheduled next week. This comes after the Federal Open Market Committee (FOMC) meeting conclusion. I would love for the FOMC meeting to have its own paragraph for illustration, but amid the whirlwind of events next week, the FOMC may well dwindle down to a non-event with similar emphasis on data dependency and patience towards further rate rises from the Fed. Onto the labour market update, however, it would be a balance between the strong 183k payrolls addition expectation against the 0.3% month-on-month average hourly earnings growth. Surprises for the latter could see reactions cutting across to the greenback in particular. If we should get a glimpse of the first reading for US Q4 GDP, expected at 2.8% quarter-on-quarter, this would likewise be a key one to watch for market implications, across to Asia as well.

Finally for Asia centric data, but with global implications, one should watch the manufacturing PMI numbers out of China. After having both the official and Caixin manufacturing PMIs enter into contraction territory in December, forecasters have pencilled in further declines to 49.3 and 49.5 respectively. The materialization, or even further disappointment, could serve as a reminder of the growth slowdown in China for the first readings in 2019, potentially denting markets across equities to commodities. This would, of course, be balanced against the trade picture as the keynote Washington talks unfold.

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