Stock Markets – Daily Note – 25/Jul

Ger30, UK100 and SP500 are CFD’s, written over the Dax30, Footsie100 and S&P500 Index futures:

European markets should open without major fluctuations, starting a week marked by the earnings season and the meetings of the Fed and the Bank of Japan. This week, the earnings season will be particularly intense in Europe. Among the various institutions that will disclose their quarterly accounts are included several European banks. This sector has been one of the worst performers in 2016 and a major source of concern for investors. In Italy, the high bad debt amounts to about 210 000 M € of which 59% are covered by provisions. In bad and doubtful loans lies a part of the need for recapitalization of some Italian banks, namely Banca Monte dei Paschi di Siena. In Germany, Deutsche Bank declined by about 42% in 2016. The bank’s activity has been penalized by the organization’s restructuring costs and the legal costs associated with the various processes in which the bank is or has been involved. This bank has a significant part of the assets represented by financial instruments and as such subject to market volatility.

US markets closed higher on Friday, thus completing the fourth consecutive week of gains. Good business results continue to be the main catalyst of the climb. From the group of the companies that have already reported their quarterly accounts (about a quarter of the total), 68% achieved higher profits than expected and 57% had revenue that beat estimates. Compared with the same quarter last year, so far corporate profits fell 3.70%. If this percentage last until end of the earnings season, then this will have been the fifth consecutive quarter that corporate profits fell. This trend overshadows a bit the fact that the American indices negotiate at historic highs, for the long term, profits and interest rates are the most relevant variables to influence the stock market. At this stage, the stock market indices seem to be sustained only by interest rates at historic lows. General Electric reported earnings and revenue that exceeded analysts’ forecasts, reaching the 2nd quarter of this year, an EPS of 0.51 USD and a revenue of 33300 M.USD, against estimates of 0.46 USD and 31760 M. €. The CEO said that the diversity and scale of the business was able to overcome the downturn and the uncertainty hanging over the global economy. The only negative point of these quarterly accounts was the 16% drop in orders for aircraft components, industrial machinery and oil equipment, which may signal some weakness in activity in the coming months. The company reaffirmed the objectives proposed for 2016. Shares of GE fell 1.63%. In the oil sector, Schlumberger and Halliburton, two of the largest suppliers of oil sector services, argued that probably the minimum the price of oil may have already been reached. In 2013, the price of crude oil traded at levels above 112 USD / barrel before entering into a strong fall that led earlier this year to levels close to 26 USD / barrel. The oil sector will be the protagonist of this week’s earnings season and its quarterly accounts will be the main challenge for the American markets. Analysts estimate that on average profits from this sector have retreated 71%. More relevant than the results will be the prospects that the CEO of the oil companies will provide. In addition to the earnings season, investors followed the interest demonstrated by Verizon concerning Internet assets of Yahoo!. According to the American press, Verizon will offer 4800 M.USD for these assets.

Asian stocks closed with contained variations. In Japan, it was published that June exports fell 7.40% (the seventh consecutive month of falls), while imports fell 19.70%. Although both falls have been lower than expected and the trade balance is positive (which will have a favorable impact on GDP), continued declines in exports may increase pressure on the Bank of Japan to weaken the yen. The Japanese currency is one of the best performers in the forex market in 2016 and has negatively conditioned the Nipponese exporters. The Bank of Japan meeting will take place on Thursday and Friday this week.