Week Ahead: Fed And Brexit Developments

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Includes: AAAU, ADRU, BAR, BBEU, BNO, BOIL, CHN, CN, CPER, CXSE, DBEU, DBEZ, DBO, DBUK, DDM, DEZU, DGAZ, DGL, DGLD, DGP, DGZ, DIA, DOG, DTO, DXD, DZZ, EDOM, EEA, EEH, EPS, EPV, EQL, EURL, EWU, EZU, FCA, FEP, FEU, FEUZ, FEX, FEZ, FIEE, FKU, FLCH, FLEE, FLGB, FWDD, FXP, GLD, GLDI, GLDM, GLDW, GLL, GSEU, GXC, HEDJ, HEWU, HEZU, HFXE, HUSV, IAU, IAUF, IEUR, IEV, IVV, IWL, IWM, JHML, JJCTF, JKD, KGRN, KOLD, MAS, OIL, OILK, OILX, OLEM, OLO, OTPIX, OUNZ, PGJ, PHYS, PSQ, PTEU, QGBR, QGLDX, QID, QLD, QQEW, QQQ, QQQE, QQXT, RFEU, RSP, RWM, RYARX, RYRSX, SCAP, SCHX, SCO, SDOW, SDS, SFLA, SGOL, SH, SMLL, SPDN, SPLX, SPUU, SPXE, SPXL, SPXN, SPXS, SPXT, SPXU, SPXV, SPY, SQQQ, SRTY, SSO, SYE, SZO, TDF, TNA, TQQQ, TWM, TZA, UBG, UCO, UDOW, UDPIX, UGAZ, UGL, UGLD, UNG, UNL, UPRO, UPV, URTY, USL, USO, UWM, VFINX, VGK, VOO, VTWO, VV, WCHN, XPP, YANG, YINN, YXI
by: Nikolaos Giannoulis
Summary

Brexit delay and Fed are to drive markets.

China-US likely to reach a temporary deal which will lift equities.

UK needs the OK from the EU to delay Brexit. Failure to get this constitutes a material risk.

Market Forecast: This week could be positive for stocks if the Fed reduces its forecast for rate hikes and delivers on expectations. However, higher U.S. rates than elsewhere among major economies will draw capital from foreign markets and ultimately put upward pressure on the dollar. Delay in Brexit may lift Europe indices and boost the pound.

Fixed Income
Benchmarks Current Yield 1 Week 1 Month YTD
US 10 Year 2.63% 0.00% -0.06% -0.05%
UK 10 Year 1.22% 0.03% 0.04% -0.05%
Germany 10 Year 0.08% 0.02% -0.05% -0.16%
France 10 Year 0.47% 0.06% -0.10% -0.24%
Japan 10 Year -0.05% -0.01% -0.03%
Italy 10 Year 2.50% 0.00% -0.34% -0.25%
Source: Thomson Reuters

S&P 500 posts best weekly gain since November. Stocks posted strong weekly gains, led by tech shares, as investors cheered renewed optimism on the U.S.-China trade front on Friday. Treasury yield dropped with the 10-year bond ending at 2.587 from 2.630% a week ago. Volatility dipped, with the VIX ending at 13.5 from 16.59 a week ago.

World Indices Return
Index 1 Week 1 Month YTD
WORLD INDEX PR 1.69% 2.50% 26.07%
MSCI ACWI PR USD 1.55% 2.28% 26.59%
MSCI-EM 0.44% 0.58% 31.99%
FRONTIER MARKET 0.83% -0.92% 8.57%
Dow Jones Industrial Average 0.93% 1.12% 47.55%
S&P 500 2.17% 2.32% 37.41%
NASDAQ 3.08% 3.26% 57.69%
RUSSELL 2000 IND 1.71% 0.74% 36.42%
S&P/TSX 60 IDX 0.10% 2.84% 25.52%
IPC 0.33% -3.10% -2.79%
BVSP BOVESPA IND 4.52% 2.53% 127.46%
STXE 600 PR 1.24% 4.34% 3.47%
STXE 50 PR 1.31% 4.84% -0.25%
FTSE 100 0.39% 0.73% 15.11%
DAX 0.60% 4.15% 7.86%
CAC 40 1.55% 5.80% 15.37%
MIB 0.87% 5.41% -2.53%
IBEX 35 -0.43% 2.52% -3.50%
AEX-Index 1.40% 1.84% 23.17%
OMXS30 INDEX 2.04% 2.67% 9.95%
SMI PR 1.69% 3.88% 7.53%
AT COM SHR PR ID 2.20% 9.89% 14.03%
AC ASIA P xJP -0.28% 1.50% 26.76%
TOPIX INDEX -0.83% 1.00% 2.65%
NIKKEI 225 -0.79% 2.03% 11.84%
S&P/ASX 200 -1.35% 1.65% 16.69%
S&P/NZX 50 GR -0.02% 1.67% 49.20%
HANG SENG 0.25% 2.41% 31.65%
KOSPI -0.47% -1.59% 9.91%
S&P SENSEX 2.80% 4.43% 44.56%
Source: Thomson Reuters

Trump hints at possible trade deal with China in the next 3-4 weeks. US-China trade negotiations will likely reach a temporary deal, transforming future negotiations into a framework to monitor China's compliance with trade and intellectual property policies.

US import prices rose more than expected in February as fuel prices surge, boosted by increases in the costs of fuels and consumer goods. The cost of goods imported from China was unchanged in February after dropping 0.3% in the prior month.

Mixed U.S. economic data. Retail sales excluding autos increased 0.9% month over month in January 2019. US manufacturing output fell 0.4% last month offset by a 0.1% rise in industrial production with the gain in utilities and mining. Initial jobless claims rose to 229,000, suggesting slowing labour market. Housing starts rose 18.6% with single-family accounting for strongest tally and permits also increased 1.4% compared to December 2018.

UBS economist warns 'Toxic' politics could damage the US economy. Data coming out of the U.S. reflected geopolitical tensions as the cause of economic damage. Hopes at administration to take responsibility for ensuring raised debt limit to protect the market from coming to edge.

Eurozone annual inflation confirmed at 1.5 percent in February. Eurozone consumer prices rose 0.3% in March, due to increases in the cost of energy, services and food, alcohol & tobacco while non-energy industrial goods prices were flat. Core inflation, which excludes energy and food prices, edged lower to 1 percent in February from 1.1 percent in last month. The lowest annual inflation rates were recorded in Croatia, Montenegro and Switzerland, whereas highest annual rates were recorded in Turkey, Ukraine and Belarus.

U.K. lawmakers voted in favour of seeking a delayed departure from the EU for at least three months, marking another step in a political crisis that has ripped through the heart of Westminster. On Tuesday, Prime Minister Theresa May's Brexit deal suffered a second humiliating defeat. And on Wednesday, U.K. lawmakers rejected the idea of leaving the bloc without a withdrawal agreement in place.

European lawmaker says ‘Trust between the US and the EU is at an 'all-time low'. American and European trade representatives met in Washington last week to iron out the differences on trade. However, both sides couldn't agree on details involving EU buying more U.S. agricultural products.

China's industrial output fell from 5.7 percent in December to 5.3 percent in February, slowest pace in 17 years. Manufacturing investment dropped to a 5.9% growth rate in February, down from 11.6 percent in the fourth quarter. Infrastructure investment grew 2.5%, down from a 5.7% rate in the three months prior.

S&P FTSE100 Europe

The week ahead. May has indicated that the much-maligned Brexit deal to be brought back in front of Parliament next week for another vote. Fed to make important forecasts as stocks on 'precipice' of breaking out.

Commodities

Commodities

Gold prices rose 0.7% for the week as momentum in the New York region’s manufacturing sector weakens. Raw commodity sector, including precious metals, boosted with the news of China’s plan of further cutting taxes on businesses and citizens to stimulate the world’s second-largest economy and the world’s largest raw commodity importer. However, this move restrains the copper prices as the cost of refining the metal will drop.

Further, though copper prices rallied towards gain on increased optimism over US-China trade deal, the prices reversed gains after the delay in announcement of the deal and over an increase in copper stockpiles. All wheat futures prices for the May contract period ended the week up, mainly on speculator buying, possibly based on pending tenders and continued very cold conditions. Looking at the two headline indices, Bloomberg Commodity Total Return rose 1.03% and S&P GSCI Total Return rose 0.75%.

Crude Oil (Weekly Outlook: Slightly Bullish): U.S. crude futures rose 3.44% to $58.42 per barrel, reached 4-month highs, as a production curb agreement by OPEC and allies along with U.S. sanctions on Iran and Venezuela tightened global supplies. Crude oil use in China, the world's biggest importer, in the first two months of 2019 rose 6.1 percent from a year earlier to a record 12.68 million bpd. The number of oil rigs operating in U.S. fields fell for a fourth straight week, at a current level of 833.00 (lowest since April 2018), down from 834.00 last week and up from 800.00 one year ago.

Natural Gas (Weekly Outlook: Slightly Bearish): The natural gas market declined during the week, reaching the $2.75 level as warmer than normal weather is forecasted to cover most of the United States for both the 6-10 and 8-14 day forecast. DOE reported that the average total supply of natural gas fell by 1% compared with the previous report week. The EIA reported that total US consumption of natural gas fell by 19% week on week.

Masco (MAS)

Masco Corporation is a global leader in the design, manufacture and distribution of branded home improvement and building products. The portfolio of industry-leading brands includes BEHR paint, Delta & Hansgrohe faucets and bath & shower fixtures, Kraftmaid & Merillat cabinets, Milgard windows & doors, Kichler decorative & outdoor lighting and Hot Spring spas

Market Data

Price as of 15/03

38.91 $

ISIN

US5745991068

Earnings Date

7-Feb

12M Total Return

-5.31%

Buy/Hold/Sell

9/5/0

Beta

1.32

Dividend Yield

1.23%

Shares Out./Float

294.49M

52-week low

27.03 $

52-week high

42.27 $

Market Cap

11.48B

Masco delivered strong sales in 2018. Net sales for 2018 were $8.4 billion, which increased 9% compared to 2017 net sales of $7.6 billion. Net sales for 2018 increased 5% due to the acquisition of Kichler in March 2018 and Mercury in December 2017 and positively impacted by increased sales volume of plumbing products and cabinetry. Operating margin decreased 110 basis points to 14.5% from 15.6% due to increase in commodity costs, the recognition of the inventory steps up adjustment established as a part of the acquisition of Kichler and an increase in other expenses.

The company is positioned to outperform with projected revenue growth of 3-5% (Ex currency) and operating margin being similar to 2018 margin of 15.1%. The company continues to successfully execute long-term growth and capital allocation strategies by leveraging a strong brand portfolio, industry-leading positions and Masco Operating System.

The strong financial position and cash flow generation, together with the current strategy of investing in industry-leading branded building products, continued focus on innovation and commitment to operational excellence, the active management of the portfolio and disciplined capital allocation, will allow the company to drive long-term growth and create shareholder value.

FY 2018

FY 2019 Est

FY 2020 Est

FY 2021 Est

Revenues

8,359

8,626

8,936

9,227

EBITDA

1,419

1,459

1,536

1,609

EBIT

1,265

1,289

1,368

1,448

Net Income

734

785

854

927

Free Cash Flow

813

839

869

897

EPS Reported

2.37

2.71

3.03

3.32

ROE

497.00%

213.00%

208.00%

-

P/E

12.30

14.4

12.90

11.70

Dividend Yield

1.49%

1.23%

1.28%

1.33%

EV/EBITDA

9.90

9.45

8.68

-

EV/Revenue

1.68

1.6

1.49

-

Double-digit growth in revenue for decorative architectural products segment.

Revenue for the decorative architectural products increased by 20% in 2018 primarily due to the acquisition of Kichler in March 2018, which increased sales by 16%. Net sales also increased due to net selling price increases of paints and other coating products and increased sales volume of builders' hardware and paints and other coating products. However, the operating margins for all the segments were negatively impacted by an increase in commodity costs, unfavourable sales mix and an increase in other expenses

Strong fundamentals for 2019.

Moderate growth is expected in some of the markets in 2019, but the company is well positioned to drive profitable growth and create shareholder value. The fundamentals of the repair and remodel industry, which represents approximately 85% of the business, to remain strong, and anticipation for adjusted earnings per share to be in the range of $2.60 to $2.80 for 2019.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.