Don’t Kid Yourself, It’s a Banana Republic

Shut it down, shut it down.

Investors have a busy week ahead starting with the reaction from the French Election. We have a ton of earnings data, economic data, a potential government shut down, and our first look at 1Q GDP. On the economic front, we have Consumer Confidence, Pending Home Sales, and New Home Sales.

The markets took a sigh of relief Sunday night after the establishment candidate, Emmanuel Macron, received the most votes in the 1st round of the French election. On the results, The Euro is hitting a 5 month high and futures markets have also gone higher. The 2nd and final round will be between Macron and far right Candidate Marine Le Pen on May 7th. The broader markets are still not out of the woods yet with Le Pen making the 2nd round, but most polls show Macron winning by a sizeable margin.

US Government Shut Down – On Friday (4/28), the U.S. Treasury officially runs out of the legal authority to spend money. If Congress doesn’t approve a new bill before the deadline, the US government would shut down. Besides national parks and monuments being closed, 800K federal workers would be told not to come to work and not get paid. The army would continue to drops bombs overseas (that obviously never stops) but the soldiers won’t get paid for it. And the NSA will keep listening to your phone calls. In regards to trading, there would be no economic data releases, which could move the markets.

Adding pressure to the negotiations are sticky parts such as funding for Sanctuary Cities, Planned Parenthood and President Trump wanting to demand money for the border wall. So much for having Mexico pay for it. The closer we get to the deadline without a deal, the markets may pull back as volatility and the VIX would rise. We would also see a move into safe havens such as Gold, Treasury’s and the Japanese Yen. If they just pass a budget that gets them through the end of the fiscal year, which ends Sept 30, or if they get an extension for a few days to hammer out details, expect the status quo. If we actually do shut down with a Republican majority House, Senate and Republican President, there is no reason not to think of the US as anything more than a banana republic.

Taxes? President Trump announced last week that sometime this week, he will finally unveil his long a waited tax reform package. Investors have been waiting for this release since he became President. Investors will be listening to see if he picks an actual tax rate and where he would raise revenue. Even though this is likely a starting point in a negotiating process, if the tax rate is lower than what the market expects, we could see markets go higher. If the tax rate disappoints and is higher than expected, we could see a market sell off.

Super Mario Speaks: On Thursday (4/27), ECB President Mario Draghi will announce the latest interest rate decision. At this juncture, investors are not expecting any changes to rates. However, investors will be listening to potential changes to the banks quantitative easing program since the European economy looks to be standing on better ground. Any hawkish comments would send the Euro higher amongst most currencies and send stocks lower.

Earnings Season: Earnings season heats up with 194 S&P 500 companies and 12 Dow components expected to report Q4 earnings this week. This is the most S&P 500 companies to report in 1 week in over 10 years. Traders can see individual stocks have huge price swings if a company’s earnings outpace or fall short of what the street expected. According to Thomson Reuters I/B/E/S, with approx. 19% of S&P 500 companies reporting 1st quarter earnings, 62% reported revenue above expectations while 75% have reported earnings above expectations. Both of these figures are above the last 4 quarters averages. This is also reversal of where we were at this time with earnings last quarter.

GDP First Release: On Friday (4/28), we get our first release of US GDP for the 1st quarter, the first with Trump as President. The first release is the most impactful. So far, Fed regional banks have been lowering their forecast of where GDP will come in at. Should the number come in higher than expected, we can expect to see equities go higher. If GDP is less than expected, we may see equities fall as investors believe the economy is not growing as fast as expected. If the number comes in much higher than expected, we should expect the White House to say it was beautiful number and the economy is growing. If it comes in lower than expected, expect Sean Spicer to call it fake news from the GDP centers.

Consumer Confidence: On Tuesday (4/25) Consumer Confidence is released. This figure has increased significantly since Donald Trump became President. Investors will be looking to see if this figure stays elevated, even though it hasn’t translated to any outsized gains in consumer spending or business investment. A scale back in this reading could see stocks slide.

 

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