- • More bad news for Europe weighs on sentiment;
- • Eurozone industrial production and economic confidence take another hit;
- • UK inflation continues to slide, falling to five year low;
- • Earnings season may provide support for equity markets.
European indices are on the decline again on Tuesday, as further bad news for Europe puts another dent in sentiment in the region.
It’s been a very busy morning on the economic data front and unfortunately, it’s just been yet another collection of disappointing and worrying figures. The most concerning are the figures from the eurozone where we saw a significant decline in industrial production in August, much larger than forecasts which were already rather gloomy. On top of this, the ZEW survey on economic sentiment showing another sharp drop from 14.2 to 4.1, while the German reading fell below 0, to -3.6, for the first time since November 2012.
The eurozone growth story may be an old one at this stage, but the rate of decline only appears to be accelerating and were seeing nothing from the surveys to suggest confidence is bottoming out. This doesn’t bode well for the end of the year, nor does it suggest that ECB efforts to slow it are having any impact.
While I still firmly believe that quantitative easing is not a road that the ECB are interested in going down, they are running out of options. They are either going to have to get creative in the coming months or give in to the fact that it the only thing that can get the eurozone economy moving again, as it has in other major economies.
The Bank of England is facing a dilemma of its own in the coming months. The central bank has been keen to return to normality on interest rate policy, at one point even suggesting it could come this year. That appears to be off the table now but their job is being made much more difficult by the fact that inflation in the UK, as in many other countries right now, is falling and is now at a five year low of 1.2%.
This can’t even be blamed on things like falling oil prices, as the core reading also fell last month to 1.5% from 1.9%. If this trend persists, the BoE will find it tough to justify a rate hike, which I’m sure is something many people in the UK will be happy about.
What will be key for the markets over the next couple of months is corporate earnings season. There has been so much volatility over the last week, driven largely by fear, that investors need a reason to buy again. We may only be around two thirds of the way into the 10% correction that so many believe is necessary, but solid earnings reports could make the current levels look quite attractive.
I think the coming earnings season is going to be quite strong for the US, with the economy continuing to recover and move towards a scenario in which Fed support is no longer required. There are likely to be a few common themes throughout earnings season though which are likely to hinder some companies and help others.
One of these is exchange rates following the strong appreciation of the dollar in recent months. Any companies with large overseas operations are going to see the dollar value of these profits fall quite dramatically, which could weigh on overall earnings. Another theme will be exposure to Europe, with the economy here coming to a standstill in the third quarter.
European operations are likely to be an issue for a large number of companies and investors will want to know what is being done to overcome this. One final theme which could help many companies, excluding producers, is the slide in oil prices. Reducing costs will help the bottom line which may help cover hits being made elsewhere.
Earnings season will get properly underway today, with Citigroup Inc (NYSE:C), Wells Fargo (NYSE:WFC) and J P Morgan Chase & Co (NYSE:JPM) kicking things off for the banks. We’ll also hear from Intel and Johnson & Johnson (NYSE:JNJ), giving investors plenty to focus on to drive the markets. The only question now is whether they’ll be good enough to rid the markets of all this unease and fear that has created all of the recent volatility and selling.
The S&P 500 is currently seen opening 2 points higher, the Dow 30 19 points higher and the NASDAQ Composite 5 points higher.
DISCLAIMER: Any views or opinions presented are solely those of the author and do not necessarily represent those of Alpari (UK) Limited, unless otherwise specifically stated. This content does not constitute investment advice.