Friday, 12 October 2012

Week in review: Unfurling the earnings...


It has been a dull week for risk assets with the FTSE 100 falling on four out of five days but shedding under a percent. Japan was the worst performer down nearly 4% and sinking towards the support level. Another week like that and the index will be at its lowest level since 1983. The western world’s equities have been looking for their next reason to move higher but, for the time-being, remain in under the shadow of uncertainty despite a number of positive surprises from the US economy such as a surprisingly sharp fall in initial jobless claims or this afternoon’s rise in the University of Michigan Consumer Sentiment Survey (reaching its highest level since August 2007).

In the immediate term, the uncertainty of the third quarter earnings season began to unwind as Alcoa released announced its earnings on Tuesday before today’s results from the financial bellwether, JP Morgan.

Alcoa, as an aluminium fabricator, does not provide much data through its financial results on the state of the global economy but the commentary can provide some nuggets. These were not encouraging this quarter with declines in Alcoa’s forecasts of China’s demand; particularly for heavy trucks and trailers. The Chinese are attempting to rebalance their economy away from heavy industry and towards consumption and higher value-added produce, but few would believe their progress has been sufficient to explain declines in the demand for heavy industry tools or electricity.

Source: DataStream
In the US however the news was better as JP Morgan’s results underlined the nascent recovery in the US housing market. The Bank expects to keep seeing foreclosures but is reducing its provisions, indicating that things were getting less bad. Overall the positive view we have of the US housing wealth effect, which should support US consumption in future quarters, was underlined by JP Morgan’s CEO, Jamie Dimon, who believes “the housing market has turned the corner."
Source: DataStream
It remains early days in the current earnings season but things have started to look up slightly since Mike’s note on the message earnings season might send to Congress. With 35 companies having reported, the beats-to-misses ratio has risen to nearly 70% for earnings.

Source: DataStream
But as Mike discussed, despite the best efforts of the central bank and the corporate world, the fiscal cliff continues to loom.

That particular source of uncertainty grew after a lacklustre showing by President Obama placed new doubt in the minds of election watchers. A repeat of the status quo (Democratic White House, Republican House of Representatives and Democratic Senate) remains our preferred formulation, even though that cocktail yielded the disastrous stand-off of last summer.  The likelihood, we believe, is that policymakers will avoid a second casting as enemies of the states they are supposed to be representing, by passing a series of compromises in the form of reduced fiscal tightening measures.

Perhaps surprisingly Mr Dimon backed several proposals put forward by the Democrats including a higher tax rate for the wealthy. “I don’t mind paying 39.6% in taxes” he said.

If he’s so keen, he can pay that and more by having his $12m remuneration package met by JP Morgan’s London payroll!

Guy Foster
Head of Portfolio Strategy

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