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The Zacks Analyst Blog Highlights: Softbank, Telstra and Geely Auto

EOG Resources' (EOG) strong inventory of premium drilling wells should back impressive production growth.

For Immediate Release

Chicago, IL – October 16, 2018 – Zacks.com announces the list of stocks featured in the Analyst Blog. Every day the Zacks Equity Research analysts discuss the latest news and events impacting stocks and the financial markets. Stocks recently featured in the blog include Softbank SFTBY, Telstra TLSYY and Geely Auto GELYY.

Today, Zacks is promoting its ''Buy'' stock recommendations. Get #1Stock of the Day pick for free.

Here are highlights from Monday’s Analyst Blog:

We Have a U.S.-Centric Global Week Ahead

An entrenched U.S.-China trade fight, fresh S&P 500 Q3 earnings reports and the latest Fed minutes: these three factors all combine to light up the Global Week Ahead.

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Each unique U.S. catalyst has a potential – to catapult U.S. developments squarely into the heart of world risk-market trading.

Firstly, fifty-five S&P 500 firms release earnings. This includes tech names like Netflix and eBay and 26 financials; including BofA, BlackRock, Morgan Stanley, Goldman Sachs, US Bancorp, BoNYM,Amex and State Street.

While very early, the Q3 earnings season has been excellent so far. About 90% (of a still small sample) have beaten analysts’ earnings expectations. This included an early and solid read on key financials late last week (if you even noticed!).

The longstanding pattern of company earnings routinely beating analysts’ expectations – the S&P 500’s best run since the dot-com mania – shows no signs of abating.

Second – hailing from outside the USA – we can look to Reuters in London’s five big world market themes. These show us what’s likely to dominate the thinking of investors and traders alike in the coming Global Week Ahead.

I kept them in order of importance to equity markets.

They reveal this U.S.-centric bias. I don’t think stock markets around the world can be led solely by the USA. It’s that ‘one leg of a stool that works’ problem.

But here’s to hoping for the best.

(1) The U.S. Stock Market Slide

The past week’s stock market slide has wiped $2.6 trillion off the value of global equity. The selloff in itself surprised no one; more interesting was the suddenness and the apparent lack of triggers.

It was a milestone week. The S&P 500 lost more than 5 percent in two days, the Nasdaq’s fall on Wednesday was its biggest since 2011, China’s slide took its stocks 30 percent off January peaks, and Taiwan’s stock futures suffered their worst day since 2000.

The warning signs are long-standing: a tightening Fed, rising dollar, escalating trade war, slowing China and fragile emerging markets. Add in renewed doubts over Italy’s debt and Donald Trump’s attacks on the “loco” Fed, and you can see why some of the market froth came off.

The million (or trillion) dollar question now is: is this the major correction many people have been flagging for months, if not years? Or not? The coming week may show.

(2) More Trade Warring with China?

Thousands of Chinese exporters descend on the Canton Trade Fair in the coming week to strike deals, sell their wares and, this year, whine about the heavy tariffs the Trump administration has imposed on their U.S. sales.

At April’s fair, exporters didn’t seem unduly concerned about trade wars. Latest data also showed healthy exports that pushed China’s trade surplus with the United States to another record high. Yuan weakness probably helped – the currency is down 10 percent since March when the first Sino-U.S. salvos were fired.

What lies ahead is the U.S. Treasury’s semi-annual report on currency manipulators. China has for years dodged being labeled one and media reports suggest it’s not been labeled this time either, even if the yuan is approaching the 7-per-dollar mark.

Calling out Beijing as a currency manipulator may give Washington more firepower in its trade dispute. But there is also the issue of the $1.17 trillion in U.S. Treasury bonds held by China.

Selling those holdings might mean short-term losses for China but could bring a fresh jump in bond yields and an even higher dollar. That would in turn put U.S. exports at a further disadvantage against Chinese, and more generally, global goods and services.

(3) S&P 500 Fall Earnings Season. Keep an Eye on the Big Banks!

Investors have punished U.S. bank shares this year, with the S&P 500 banking index down 5 percent year-to-date versus a 2 percent gain for the broader market. So sector giants JPMorgan, Bank of America, Bank of New York Mellon, Goldman Sachs and Morgan Stanley will need some pretty strong Q3 earnings if they have any hope of changing that negative view.

They are indeed expected to deliver 26 percent earnings growth, outstripping the 21.4 percent predicted for the S&P 500 according to I/B/E/S Refinitiv. But that may not be enough.

U.S. longer-dated bond yields have finally started rising — a positive for banks. But as the Fed raises interest rates, banks will be pressured to pass on those higher rates to depositors. And loan growth remains sluggish, seemingly impervious to big recent tax cuts, and a worry if the economy indeed slows down next year as many expect.

Share performance may boil down to valuation. For the next 12 months, Goldman Sachs appears the cheapest, with investors paying $8.90 for every dollar in expected earnings while they pay $11.90 for Bank of New York Mellon. The latter, unsurprisingly, is the worst performing stock over the last two years in this group of U.S. banks.

(4) No Easy Brexit? Or Just No Brexit?

Sterling has strengthened 2 percent versus the dollar over the last fortnight, supported by expectations that an EU leaders summit in Brussels on Oct. 18 will yield a deal on Brexit for British Prime Minister Theresa May. If the outcome is positive, investors could unwind more of their short sterling bets, setting the currency firmly on the road to recovery.

But with less than six months to go before Britain leaves the bloc, fears about the Irish border issue will still hound the pound. Northern Ireland’s DUP, the party May depends on for her parliamentary majority, has threatened to withdraw backing for next year’s UK budget should any deal split Northern Ireland from the British mainland. That would effectively be a vote on May’s administration.

Reuters polls forecast sterling at $1.37 six months after Brexit, up from $1.32 at present. But the DUP could well scupper that rally if it triggers new elections. For now, though, currency markets appear priced for a deal being finalized next week. A setback could inflict a lot of pain.

(5) Italy Submits Spending Plans to the EU

Italy’s budget standoff with Brussels will come to a head on Monday when it submits its 2019 spending plans.

Already, Italy’s combative budget plan — which proposes running budget deficits far higher than previously agreed with the EU — has driven government bond yields to their highest in four years.

The extent to which the anti-establishment government in Rome tests EU authorities’ patience will further affect bond spreads, particularly with ratings reviews from Moody’s and S&P Global due later this month.

Both agencies rate Italy two notches above junk so any downgrade will put the Eurozone’s third largest economy at greater risk of losing investment-grade status and the billions of euros of fund flows that go with it.

Not that the saga ends on Monday. The EU then has a week to identify any “serious non-compliance” and two weeks to decide if it will reject the budget altogether.

But the first step is a significant one, and likely to give investors an idea of whether Italy and the EU can work together to come up with a solution.

Top Zacks Rank Stocks—

Softbank: This is a cornerstone $96B market cap Japanese stock. The Zacks VGM score is B. Last week’s sell-off opens a nice entry point here.

The company's many business segments include: Mobile Communication, Broadband Infrastructure, Fixed-line Communication, Internet Culture and Others.

It provides:

·         Mobile communication services and sells attached cellular phone terminals,

·         High-speed Internet access services,

·         Internet protocol (IP) phone services and contents,

·         Fixed communication services,

·         Internet advertising businesses,

·         Operation of various electronic commerce sites,

·         Provision of membership services,

·         Distribution of software and peripheral devices for personal computers and

·         The operation of Fukuoka SoftBank Hawks-related business.

Telstra: This is a $26B telco for Australia. The annual dividend is 6.86%. The Zacks VGM score is C. This non-U.S. defensive stock may have put a bottom in around late June of this year.

Geely Auto: This is the big Chinese automaker. I was surprised to see it on our list. However, after the deep mainland China stock selloff, it is a solid Zacks VGM of A, along with a #1 rank.

When do you pick up Chinese stocks? It’s a million if not trillion-dollar question looming over equity markets.

Key Global Macro Events and Data—

On Wednesday, the Fed releases its latest minutes.

On Monday, watch out for Monetary Aggregate Data from Mainland China. It will arrive on Aggregate Renminbi Financing, the M2 Money Supply and New Yuan Loans to the private sector. M2 is growing 8.5% for example. With a 6.5% GDP growth rate and 2% inflation, that is spot on.

Turkey’s unemployment rate in a prior reading was 10.2%. The new one is 10.8%. That’s not good news here, or for emerging markets generally.

On Tuesday, the U.K.’s ILO unemployment rate is at 4.0%. That is supposed to stay flat. The U.S. is at 3.7% now. There could be a positive surprise, like the big brother U.S.A. Or with Brexit, is a negative surprise more likely?

The influential German ZEW economic sentiment index for the entire Eurozone (-7.2 prior, -9.0 4cast) and specifically for Germany (-10.6 prior, -8.0 4 cast) are negative and getting worse now. We get a fresh set of ZEW readings.

On Wednesday, the core Eurozone HICP inflation rate comes out. It was 0.9% in a prior reading. H stands for harmonized. This is the reading that matters to the ECB. The core personal inflation reading is 2.0%.

The proxy GDP for Brazil comes out. Look for 2.0% y/y. With high population growth, this is likely a recessionary level of economic growth.

Russia’s unemployment rate is 4.6%. We get a fresh reading.

On Thursday, Australia’s unemployment rate comes out. It has been 5.3%. It may get to 5.2%.

U.S. initial claims are out again. These are quite low now, at 214K.

On Friday, China’s GDP growth rate comes out. It had been 6.7%. It is forecast to be 6.5%. And it will be 6.5%. Welcome to the non-event of Chinese growth reporting.

Retail sales growing at 9.0% are the better stock market fundamental, but stocks there are tanking anyways.

The Fed’s Bostic and Kaplan speak at separate events in the USA.

About Zacks Equity Research

Zacks Equity Research provides the best of quantitative and qualitative analysis to help investors know what stocks to buy and which to sell for the long-term.

Continuous coverage is provided for a universe of 1,150 publicly traded stocks. Our analysts are organized by industry which gives them keen insights to developments that affect company profits and stock performance. Recommendations and target prices are six-month time horizons.

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