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Trump will get the weak dollar he likes from a China trade deal but not if he goes after Europe

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A trade deal with China could stop the dollar’s rise, but it may not stay down if President Donald Trump then turns his focus to tariffs on European cars.

U.S. trade negotiators are in China this week, and stocks and risk assets have risen on optimism that a deal will be reached and that Trump will not impose new sanctions on the March 1 deadline, if talks are continuing. At the same time, the dollar has moved higher, after a series of more positive U.S. data, including Thursday’s CPI.

“When you look around the world, that seems to be where the big economic risks are emanating from. The U.S. economy is slowing, but it’s still growing above trend,” said Marc Chandler, Bannockburn Global Forex chief market strategist. “The dollar has gone up every day, except for one, since the jobs data, and that’s right after the Fed sounded so dovish.”

The dollar index has risen 8.4 percent over the past year, boosted by concerns that trade wars and tariffs will harm the global economy. But recently, its rise has been fueled by the economic data, after January’s robust jobs report reduced worries about a recession. Trump has said in the past that a strong dollar hurts the U.S. while other countries manipulate their currencies, but other administration officials have backed a stronger dollar.

Strategists say the initial reaction in the dollar, should the U.S. and China come up with a trade deal, would be a decline, as emerging market currencies jump and the euro gains, at least in the short term.

But the Commerce Department is soon expected to release the results of its study of the global automobile industry, through the prism of national security concerns, and many analysts believe it will recommend tariffs on European vehicles. The report is expected Feb. 17, and the administration would then have 90 days to act on it.

Mark McCormick, TD Securities head currency strategist, said the euro could head to the top of its recent range, to about $1.16 after a China deal. “If there are European tariffs, we’re going to 1.10,” he said. Euro/dollar was at 1.1264 Wednesday.

“The markets are trying to price different outcomes, and they’re all overshooting because nobody has any conviction on what to do on any asset class,” said McCormick, of the effect of trade wars. “It weakens global growth. It impacts U.S. multinationals’ operations. It impacts local economies. It changes the trajectory of monetary policy. It becomes a very challenging environment to build scenarios around. Everybody is just kind of waiting for some solution, whether it’s Brexit, Trump China trade issues, some of the broader discussions around trade.”

The euro, in the meantime, has been responding to weakness in European data, concerns about Brexit and trade uncertainty. Trade experts have said the U.S. will likely reach a China deal before turning its sights on Europe and then Trump may well impose tariffs.

“Auto tariffs would hit the euro zone very sharply. That would be a negotiating tactic. I think the problem with this again is you might have a very adverse reaction in global financial markets since that kind of thing would undermine the sustainability of that kind of approach,” said Ben Randol, G-10 foreign exchange strategist at Bank of America Merrill Lynch. “It just feeds the narrative of a generalized global trade uncertainty.”

The euro would dive on new tariffs, and the dollar would strengthen.

“The U.S. dollar goes up on issues of trade uncertainty because the rest of the world is hurt more,” said Randol.



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Booming rally in small-cap stocks reaches historic proportions

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Traders and financial professionals work ahead of the opening bell on the floor of the New York Stock Exchange (NYSE), January 14, 2019 in New York City.

Drew Angerer | Getty Images

Traders and financial professionals work ahead of the opening bell on the floor of the New York Stock Exchange (NYSE), January 14, 2019 in New York City.

Small caps’ snapback is flashing an ominous signal.

The Russell 2000 has rallied 16.5 percent in 2019, the third best start to a year since the index’s inception. However, small caps’ future is bound to be bleaker if history is any guide. According to Jefferies, in the previous five best starts to a year, small caps suffered weaker-than-average performance in the following three months and squeezed out only a 1.2 percent gain for the rest of the year.

“Can’t draw up a better start to new year than this, however we need a pullback,” Steven DeSanctis, a Jefferies strategist, said in a note on Sunday. “We’d like the market to take a breather.”

He added that earnings have shown strong double-digit growth, but small caps still trail large company earnings, and the outlook for first and second quarter is “in the red.”

Small-cap stocks dipped into bear market territory when recession fears triggered a massive sell-off in December. Now, the group is up 24 percent since Christmas Eve, but the strong comeback might be overlooking the poor earnings outlook. Wall Street is now foreseeing a 2.9 percent decline in small-cap earnings in the first quarter, according to FactSet. In addition, the China trade uncertainty is clouding the road ahead.

“If the U.S. does not get a trade deal done with China over the next few weeks, a recovery in earnings growth is unlikely, as companies put off capex until 2020,” DeSanctis said. “This is one of the biggest risks for the market and explains why we have not raised our Russell 2000 year-end target of 1550.” The index is currently trading at around 1,569.

Growth stocks are seen beating value stocks in the small-cap world given the earnings growth, DeSanctis pointed out.

“The next two quarters should be weak and even down year-over-year for Small and Large caps. We think this supports our Growth over Value theme. [Growth stocks] do look better with the price to book and price to sales ratios double digits below average,” he said.

The strong rally coupled with downward earnings revisions have also made small caps expensive again in a short period of time. The Russell 2000 is trading at 19.8 times forward earnings.



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Papa John’s to struggle despite activist, analyst downgrades to sell

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A customer enters a Papa John's restaurant in Louisville, Ky.

Luke Sharrett | Bloomberg | Getty Images

A customer enters a Papa John’s restaurant in Louisville, Ky.

Papa John’s investors will be disappointed in the near term as sales struggle, according to one Wall Street analyst.

Stifel’s Chris O’Cull downgraded the stock to sell from hold on Monday and wrote that the company’s recent promotions suggest the embattled pizza maker is struggling to compete for customers in the face of low-price deals at rivals Dominos, Pizza Hut and Little Caesars’. But for the restaurant chain to bolster sales, the analyst believes it will need to commit to subsidizing franchisees, a direct threat to earnings over the next few years.

“In order for Papa John’s to drive transactions we believe it will need to commit to an everyday low price menu that will probably hurt franchisees’ profits until consumer perception of its value changes,” O’Cull wrote in his note. “These offers are clearly designed to drive transactions, but to be successful they must increase transactions enough to offset the dollar impact of the discount, otherwise the results lower store margin percentage and dollars.”

Stifel reduced its 2019 earnings per share estimate to 80 cents from $1.20 (well below the Wall Street consensus estimate of $1.19) and cut its price target to $35. The new price target represents 22 percent downside from Friday’s close of $45.26.

The downgrade comes about two weeks after the company announced a $200 million investment by activist hedge fund Starboard Value. Papa John’s said Starboard CEO Jeffrey Smith will become its chairman following the fund’s investment in the form of a convertible stock purchase of 11 to 15 percent.

Activist investors typically accumulate stakes in companies they believe are undervalued and encourage executives to adopt changes they think will boost returns for shareholders. Such demands can range from board seats and CEO replacement to an entire sale of the business.

Papa John’s stock was unchanged in premarket trading Tuesday morning.



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UAE announces IDEX weapons deals as Middle East arms spending climbs

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Attendees walk the floor at IDEX, the International Defence Exhibition and Conference, in Abu Dhabi in 2015.

Markus Matzel | ullstein bild | Getty Images

Attendees walk the floor at IDEX, the International Defence Exhibition and Conference, in Abu Dhabi in 2015.

The United Arab Emirates announced about $1.35 billion in defense deals with local and international companies on the opening day of IDEX 2019, the International Defence Exhibition and Conference, in Abu Dhabi on Sunday.

Of the 33 deals announced Sunday, 18 were domestic and 15 were with foreign firms, the latter accounting for just under $1.1 billion of the total, an IDEX spokesperson said during a news conference.

American companies took the greatest share of foreign sales, at about $490 million. Led by Raytheon, Lockheed Martin and Hesco, the deals will provide missiles, new radar systems capabilities and defensive shelters for the UAE military, respectively. Others notching sales to the country included France’s Thales, Australian firm EOS Defense and Germany’s Rheinmetall Electronics.

The deals with 18 domestic firms highlight the small Gulf country’s investment in developing its own defense manufacturing industry as part of a drive to diversify its economy away from oil.



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