When companies report quarterly earnings, the market reaction is usually asymmetrical. With the same deviation from the estimates, up or down, disappointments are punished much more than positive surprises are rewarded. In practice, if the estimate is one euro of earnings per share, a result of 0.97 often causes a loss on the stock market of 5 or more per cent, while a result of 1.03 leads to an increase that rarely exceeds 1- 2 percent. This happens because the market knows that companies love to beat estimates and therefore keep the guidance low just to be able to have a margin to surprise positively. Seen from the market, therefore, exceeding the estimates is like a tip that has become customary and therefore does not warm hearts that much.
These days, on the occasion of the publication of the quarterly, however, we are witnessing an unusual phenomenon. Those who disappoint are judged without extenuating circumstances and are punished with the maximum penalty, but there are frequent cases in which those who surprise positively are also punished with a reduction unless the positive surprise is really significant.
Various explanations come to mind. The first, psychological, is that markets are so spoiled (particularly after the US tax reform) that they feel marginally even negative satisfaction with good news, like the black and white diva who almost feels annoyed by yet another basket of flowers that she no longer knows where to put. The second is the positioning of the market, clearly biased towards the upside. On this, however, there are no particularly relevant empirical confirmations.
The third, most unpleasant, is that the feeling is spreading that it can't get any better than this, while it can get worse, especially from September. It is as if one wanted to exit the market and expected the announcement of earnings to take the last rise, only to find many who had made the same reasoning and exit stepping on each other's toes with the stock going down despite the good results.
What is worrying is not the economic cycle (which may not sustain the strong pace of recent months but which will still remain in good health for some time to come). AND monetary policies do not arouse anxiety, for the moment, either, moving along long-announced paths or limited to modest technical adjustments, as we are seeing in Japan.
So what induces this desire to take profit and put oneself at the window? The duties and Italy and, even more, the combination of the two factors. Attention, on both fronts everything is open. The outcomes could certainly be negative, but also non-disruptive and even positive. The problem is, we don't know. We are not faced with an announced storm, but with the uncertainty which in any case, at high market levels, leads to realizations.
Let's start come on duties. There has been an easing of tension with Europe and a strong and unexpected escalation of the confrontation between the United States and China, which may develop further in the first days of September.
We have passed, in an increasingly rapid sequence, from duties on steel and aluminium, to those of 25 per cent on the 50 billion equivalent value of Chinese products (in two tranches, from 34 and 16) up to those of 10 per cent one hundred out of 200 billion, to be implemented precisely in four weeks. In recent days, given the Chinese devaluation, the planned 10 percent has been raised to 25 without excluding, with the renminbi which has started to fall again, further rate increases and further widening of the underlying, which could eventually include all US imports from China, none excluded.
From the Chinese adjustment maneuvers on the exchange rate and from the harshness, even verbal, of the positions taken, it is understood that the two sides, in particular the China, are preparing for a major and long-lasting confrontation.
Until now, looking at change and purses, it is America that appears to have the big advantage. The dollar strengthens, the renminbi weakens every day. New York gains 6 percent since the beginning of the year, Shanghai loses 18. America grows by 4, China struggles to maintain its official 6.5. Trump, however, doesn't have much time left. His popularity is now higher than Obama's in the same place in the mandate, but it is fragile.
Raising the tone with China is easy as long as the stock market is doing well, it would become much more difficult with a down or even frightened market. Trump he knows the stock market won't go up forever and he has to take advantage of the moment. But China knows it too, which is digging trenches waiting for better times that could arrive as early as November, if Congress passes to the Democrats, and even more in the following weeks if the lower house starts the Trump impeachment procedure and the purse, frightened, begins to descend.
Trump's need to hurry and China's willingness to bite the bullet in view of more favorable times suggest a fiery September. However, we must not forget that even Xi Jinping has his problems. Having assumed absolute powers, any damage created by the duties will be charged to his account. Now it is true that China is hypersensitive on the issue of defending its dignity in the face of foreigners and that Xi will be able to leverage pride and patriotism for some time, but not forever. For this reason, a compromise agreement, or at least the reopening of serious negotiations, by the end of this year cannot be ruled out. Just as the optimal final scenario, that of a generalized lowering of customs barriers, cannot be completely excluded.
As for theItaly, making predictions is just as difficult. The dispersion of possible scenarios is very wide. They range from a frank but civil and reasonable negotiation with Brussels to a break with unpredictable consequences. We limit ourselves to recalling two factors.
The first is that there is not only Plan A and Plan B. There is also Plan C, which consists in waiting for the European elections to change the political orientation of Europe and the nature of the euro. Plan C, the Paris of Henry IV, would be well worth putting in place a Plan A, i.e. a moderate budget.
The second is that Italy is not the only player on the pitch. Until now it has been said that Germany and France, cornered, will give more space to Italy. But there is also the opposite hypothesis to consider, or that in the face of the ongoing erosion of consensus (Cdu-Csu for the first time below 30, Macron at a minimum of popularity) and the possibility of a further weakening next year, Germany and France try to play on the advance and to confront Italy in a hard way.
Here too, as with the duties, reasonable and positive scenarios cannot be excluded. Germany knows that one day it will have to accept a European public investment plan if it wants to save the Union. Why not speed it up, asking Italy in exchange to contain its propensity to spend?
In conclusion, two years ago at this time the world seemed calm, but also stagnant. Today everything is moving and there is more growth, but the wind has blown into the house and we don't know what it will do.
The slowness and prudence with which the central banks continue to normalize monetary policies lead to the exclusion of sensational air gaps in the growth of the coming months. However, it cannot be ruled out that big politics or the markets themselves create the air pockets. Big politics, however, will be very careful to move from threats to open warfare. As for the markets, 2018 as a year of profit taking means that we will arrive at 2019 less loaded, that any corrections will be less heavy and that subsequent recoveries will be more likely.
In short, there are not yet the conditions to launch alarms but there are no longer the conditions to seek returns at all costs by taking too much duration and credit risk or with aggressive equity exposure.
For the moment, it is sufficient to play defense on bonds (good issuers, durations not exceeding 5-7 years, ample space for inflation-indexed issuers, a few emerging geopolitically well-selected and not bought en bloc with ETFs, the Italian part indexed and not at a fixed rate) and to concentrate the attack on the share market (growth at reasonable and defensive prices) in quantities that are in any case lower than those of previous years.
In short strong dollar as long as the tariff war remains hot and European stock markets, as a result, buoyed by the weakness of the euro.
