Welcome to Before and After.
This show is all about opportunities
around upcoming events and
announcements and helping you
understand not only what could
happen, but what you can take
away from what did happen.
And the upcoming US non
manufacturing, ISM is going
to tell us a lot.
Let's take a look at some of the
possible scenarios in the before
portion of our episode.
The Institute of Supply Management
or ISM non manufacturing
is absolutely key to upcoming market
action as it's this part of the
US economy that isn't supposed
to be a drag, well, not yet
anyway.
Unlike manufacturing, which has been
taking a beating of late, The ISM
non manufacturing represents what's
supposed to be the healthy parts
of the economy, like business
activity and employment.
The manufacturing sector grabs most
of the headlines, but the non
manufacturing or services sector
is a much larger component of
the US economy.
The September number released on
October the 3rd was a big shock and
the market did not like it.
The instant it came out the S&P
plunged 1.2% in
less than 15 minutes, an accelerated
selloff, especially for this subdued
volatility environment.
Take a look at this Refinive chart.
The September non manufacturing
ISM report missed badly.
The expectation of 55.2
instead came in at 52.6
and remember, the magic number is
50, below that and we're
in contraction territory.
The manufacturing sector can
contract without creating a
recession, but on both the last
two occasions that the non
manufacturing sector was heading to
50 and perhaps even below,
the economy was heading towards
recession.
This is a key barometer to gage
whether the US economy is
deteriorating and whether the
slowdown is spreading to the
services sector and then ultimately
the consumer.
So what should we be looking out
for?
A solid beat could create an upside
panic in equities, followed by a key
date reversal in stocks.
A bit like a last hurrah before
people lock in profits.
Inline probably means tepid
buying on unimportant volume.
A miss and you could very well see
the same instant reaction as
October's number, with stocks
dropping into an air pocket
and worrying about what happens
until the next rate setting meeting.
Sub 50 and people will be
reaching for the hardhats as the
calls of recession will certainly
start ratcheting up again.
If you're looking for a way to play
this though, consider the juicy way.
The retail ETF, it had a 3
per cent intraday range move
at the last non manufacturing ISM.
This week we are going to look at
BMW as they will announce earnings
and we want to examine some possible
actions.
Take a look at this Refinitive
chart. BMW is earnings announcements
come at a time when they face all
sorts of macro issues.
Autos have been at the epicenter of
the slowdown in global manufacturing
that has spread along the supply
chains from China.
It has seen a steep decline in
global sales, where changes to
emissions policies in China
and Germany have also had a
huge impact.
BMW is at ground zero of
the macro slowdown with additional
direct adverse effects from the
trade wars and Brexit.
Germany's manufacturing industry,
dominated by engineering and
particularly the auto sector,
has been in recession territory for
six months without officially
registering a full blown recession.
In fact, Germany registered one
of the worst manufacturing figures
in the developed world last month
when their manufacturing PMI came
in at a horrendous forty
one point nine.
So BMW has got every possible
impediment to delivering results.
Now, despite those roadblocks,
the German autos have proven
themselves to be robust.
But BMW's results will really
put that to the test.
What could happen to the stock?
We should look at BMW's biggest
competitor, Daimler.
Daimler reported on the 24th of
October and after a slight earnings
beat on severely lowered estimates,
the stock rallied that day, up
3.4%.
Daimler finished the month as the
best performing stock in Germany's
headline equity market, the DAX
up 14%, while B MW
was only up 6 %.
No one expects much from BMW
on the top line revenues, so this
is the time for them to show they've
learned how to navigate an
increasingly complex global supply
chain.
What's the bottom line here?
Since nobody expects much, the risk
seems to be squarely on the upside.
A bullish tape in Germany this week,
even if the German PMIs
are wretched, which is what we all
expect, would only bolster this
take.
Negative headlines with constructive
price action would certainly be a
strong buy signal for the fourth
quarter.
The big caveat is if we have
a horrendous miss and a lowering
of guidance, this could lead to
profit taking in the DAX index,
which was one of the best performing
indices in the world last month,
up three point five percent, largely
on optimism that the bottom is
priced in.
Okay, so ISM and BMW
are two big events to be aware of
this week.
But what about what happened last
week?
I'm referring, of course, to the
hugely important, After,
the non-farm payrolls.
A pretty decent beat came in at
128,000 new jobs versus an
expectation of 89,000 and
a huge upward revision that
added an additional 95,000
jobs to the previous readings.
So it seems the Fed might just have
been right to put a pause on rate
cuts, which looked like they may
already be adding some positive mojo
to the economy.
The S&P has rallied about 40 basis
points off of it, which is not
exactly earth shattering, but we
might be close to a near-term top in
equities as the Fed cuts is being
fully digested, along with the
realization that the Fed might now
be on hold for some time.
But watch US banks who will likely
love the fact that the economy is
firm and that rate cuts are
on hold.
It gives their margins a tiny bit of
respite.
There it is, ISM, BMW,
non-farm payrolls; three
events that have or will shape the
markets for the rest of the year.
I'm Jamie and this is before and
after the twice weekly market show
from Refinitive.
Join us again on Friday
and be sure to share this video.