Earnings stream in focus

Summary

Stock market attention is fixed on another set of key earnings due in the hours and days ahead.

No China crisis

There is no trade led slowdown in China. At least not yet. Stock markets there and in the region fell in the wake of the downtick in GDP, though not as sharply as per some daily declines of late. European indices and U.S. futures shrugged off the weak data entirely. Beijing’s longstanding deleveraging programme (note recent falls in money supply readings, namely M3) is a likelier – and hence more benign – explanation as to why growth missed the 6.8% foreseen by consensus by a tenth of a percentage point. Aside from that, Chinese growth and activity trends are largely intact. They’re also still close to firing on all cylinders, looking at recent trade output. Monday’s growth data therefore sounds fewer alarms on the short-term outlook for risk-taking. This keeps the focus on optimistic expectations for corporate earnings, another large raft of which will land in days ahead.

Europe wobbles with oil

European markets and even more so, the FTSE hinge rather more precisely on oil and metals than Chinese growth or markets, at the moment. Additional data showed June crude imports to the country fell to a 6-month low. South Korean imports fell to the lowest since January 2015, as buyers prepared for the return of sanctions on Iran. The news means it was even worse timing for the WTI/Brent discount to double last month—one of the fastest widenings on record—imposing steep losses on oil desks. Some of them will cover by selling. Together with re-emerging Brent contango—when the spot is lower than the forward price—as supply rises, it’s not a good look for oil shares. One takeaway is that even if earnings from large stock market component in coming days are strong—for instance Netflix and Unilever—this may not suffice to offset existing bearish undercurrents entirely.

Watch Netflix

Netflix will kick off Big Tech reporting after U.S. markets close on Monday. The streaming giant’s Q2 report will be more of a fulcrum for markets than the first batch of large U.S. bank earnings on Friday. Nowadays, shares in three of the largest North American lenders can slide, as they did on Friday, and the market will not mechanically fall into the red, unless broader sentiment is awry. Wall Street closed firm at the end of last week. Indications are likely to be more pessimistic if a web leader that also reads to modern consumption trends, like Netflix, misses the quarterly mark. Conversely, a bumper report will lift expectations for other large technology components that are set to report in coming days and weeks. In that case, stock markets will feel the beneficent effect.

Figure 1 - S&P 500 TRBC sector market capitalisation as of 13th July 2018 – source Thomson Reuters/City Index

Bank of America needs to show loan growth

Bank of America, will, like its larger and more diverse rival JPMorgan, probably report a satisfactory rise in profit in a short while. With the latter showing expansion in loans whilst the other consumer-oriented lender, Wells Fargo lost out, investors want to see whether BofA relinquished market share. If so, any share price reward for strong top-line earnings is likely to be tardy at best, as seen with Citi and the other banks that reported on Friday. U.S. Retail Sales are the main top-tier data release remaining. In a ‘hot’ economy though, the New York Fed manufacturing index has also become influential of short term fillips and down drafts of late. A slight pull back is forecast for monthly sales to a 5% rate, and a similar level of cooling is seen in the NY index to 22.