Recent market gains have followed decent U.S. Q4 2018 earnings releases so far. But stay vigilant on volatility: a wide range of unresolved geopolitical problems still could cause upset, as could future changes in earnings expectations.

1. U.S. Q4 earnings releases suggest continued strong YoY growth but future revisions could start to set a different tone.

After a torrid end to 2018, markets have so far taken heart from initial releases in the U.S. Q4 corporate earnings season, now underway. Q4 earnings growth is expected to remain strongly positive, with consensus estimating a rate of 11.2%. However, as always, it is worth looking beyond the headline data and, as we discuss on page 2, analyst revisions are increasingly downwards, with investors keen to find out how trade disputes and a softer Chinese economy have impacted U.S. multinationals. There are also increasing concerns, as the government shutdown drags on, that it will have a growing impact on the real economy and could soften business and consumer confidence – creating an impact that could outlast the shutdown itself.


2. Eurozone data suggests a continued loss of steam and Brexit developments could well prompt more market volatility.

Caution is advisable on the macroeconomic and political outlook elsewhere too. In the Eurozone, industrial output has been falling and inflation data remains obstinately low (page 3) although it appears that a German technical recession may have been avoided (page 4). The Brexit drama also continues, with Prime Minister May’s plan thrown out by the UK parliament on Tuesday. GBP rose after this event, but it is premature to be confident about eventually reaching a “soft Brexit” or “no Brexit” outcome, although an extension of Article 50 looks increasingly likely. Mrs. May is now involved in cross-party talks to find possible alternative approaches and parliament will debate these on January 29, but any path forward will not be a smooth one and market volatility could be high.


3. Trade data have prompted more China stimulus commitments. Less pronounced USD strength would be helpful for Indonesia.

Asia has seen a range of good and bad news this week. In China, disappointing December external trade data published at the start of this week prompted further government stimulus commitments and a subsequent market rally. Nonetheless, worries about how effective or quick-acting these measures will be, or the likely extent of the Chinese growth slowdown, will persist. In Indonesia, however, Bank Indonesia has managed to keep rates on hold (page 5) and pressures on the Indonesian rupiah (IDR) could well be less in 2019 than in the year just ended. Much will depend on future trends in the USD, one of our six 2019 themes. As we discuss on page 9, recent weakness in the USD is unlikely to become a trend, but subsequent USD appreciation in 2019 is likely to be only moderate – helping Indonesia and many other emerging markets.


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