Better-than-expected earnings versus the Eurozone crisis.

24th July 2012

Ian Copelin, Investment Director, my wealth, comments “The last seven weeks have been very enjoyable, as the market gave us the rare opportunity to focus on companies as the earnings reporting season continued to filter through, rather than the Eurozone debt crisis.

Upbeat earnings have helped lift equity markets:  last week European stocks climbed for the seventh straight week (the longest winning streak in more than six years), as stocks such as ASML (a Dutch semiconductor manufacturer); Akzo Nobel (a chemicals and paint producer that owns Dulux, Cuprinol & Polycell); Koninklijke Philips Electron (a manufacturer of medical systems and domestic appliances – better known in the UK for its shaving products & TVs); and SAP (a software company) all posted results that beat analyst estimates.

In the US, 93 companies (73.23%) out of the 127 companies in the Standard & Poor’s 500 Index that have reported quarterly earnings have topped analyst estimates.  McDonald’s (the ‘restaurant’ chain) is the one notable company that has missed its earnings estimates.

Consequently, global equity markets have rebounded strongly from this year’s low at the start of June.  Sentiment was also helped as central banks from Europe to China eased monetary policy to help spur economic growth.

Unfortunately, these gains have been pared back this week on concern that Europe’s debt crisis is deepening, as Spanish bonds declined, pushing the extra yield investors demand to hold Spanish bonds over German bunds surged to a record since the introduction of the Euro.  Spain’s recession is now expected to extend into next year.

In addition, the region of Valencia said that it would seek a rescue from the central government.  Valencia, has already used government funds during the first half of the year to meet debt repayments, but it still needs to repay nearly €3billion by the end of the year.  Although the amount is not massive, which would suggest the market is overreacting, given the increased market concern about the overall stability of the country and its banks, any news is bad news.

Yields on Italian, French and Greek bonds have also climbed on the heighten uncertainty.

Making the situation worse ahead of a meeting tomorrow in Athens between the troika of international creditors to Greece (the European Commission, the European Central Bank and the IMF), the Germany Vice Chancellor, Philipp Roesler, said that if Greece doesn’t fulfil its loan conditions, “then there can be no more payments”.

Today we are currently treading water:  although Spain successfully sold €3.05 billion of three-month bonds today, at a yield of 2.43% (compared to 2.36% on June 26), US futures are currently indicating a flat opening, ahead of earnings reports from Apple and United Parcel Service, while the FTSE-100 is currently unchanged at 5533 ahead of a very busy couple of days during which 23 companies will report.”