EQUITIES END THEIR RALLY ON BAD DATA

 
David Morris
GLOBAL stock indices have proved to be extremely resilient over the last couple of weeks, despite the uncertainties which continue to cloud the economic outlook. This strength has confounded many of us who thought that equities would struggle to make progress once the US Federal Reserve’s $600bn asset purchase programme concluded at the end of June. The slide in equity prices that began in May appeared to anticipate the removal of the stimulus. Yet the last few weeks have seen prices rally sharply and break above significant resistance levels. Ever since the Greek parliament voted in favour of additional austerity measures, investors have been in “risk on” mode.

But sentiment has suddenly turned negative once more. There is really no way to pretend that Friday’s US non-farm payroll data was anything but dreadful. Meanwhile, the political posturing over the debt ceiling continues, much to the disgust of many Americans who are increasingly fearful of what the future may bring. Additionally, the European debt crisis has escalated sharply. Now Italy’s bond yields are soaring, as the country’s near-term funding requirements come into focus. On top of this, China’s latest CPI, PPI and trade balance data were released over the weekend. Inflation came in much higher than expected, while exports hit an all-time record. As a result, it now seems unlikely that policymakers have finished tightening monetary policy.

Now attention turns to the second quarter earnings season in the US, which kicked off last night with Alcoa reporting after the close. This week sees around 4 per cent of S&P 500 companies release earnings, while the vast bulk (84 per cent) of reports come out between 18 July and 5 August. Corporate profit margins will still be under pressure from the elevated fuel and commodity prices that we saw just a few months ago, while high unemployment levels mean that there is little opportunity to pass these raised input costs on to consumers. Once again, investors will want to see both revenues and earnings beat analysts’ estimates, but they will pay particularly close attention to forward guidance. Chief executives need to express optimism in their outlook for the rest of the year, or equities will struggle to make headway over the summer months.