World week ahead: Earnings aren't everything

Monday 19th July 2010

Solid earnings data from corporate America has done little to ease investors' concern about increasing signs that the pace of growth in the world's biggest economy is slowing.

On Friday, General Electric Co, Bank of America Corp and Citigroup Inc beat Wall Street's expectations, but investors sold some shares of all three after the companies reported a drop in quarterly revenues.

The Dow Jones industrial average dropped 2.52% by Friday's close. The Standard & Poor's 500 Index declined 2.88%. The Nasdaq Composite Index plunged 3.11%.

For the week, the Dow fell 1%, the S&P 500 was off 1.2% and the Nasdaq Composite lost 0.8%.

While the quarterly results contributed to the negative sentiment, lower energy costs pushed consumer prices down for a third straight month in June, the latest economic indicator showing the pace of the recovery is slowing.

A separate report showed the consumer confidence has dropped to its lowest in a year.

The sentiment figures showed a record-low share of Americans expected their incomes will rise in the next 12 months, underscoring growing pessimism over employment prospects, Bloomberg News reported.

Declining confidence may further restrain consumer spending, which accounts for 70 percent of the economy, and hinder the recovery in coming months.

In the week ahead, the dual focus on earnings and the economic data front will continue.

There will be results from 12 Dow components, as well as earnings from Goldman Sachs Group Inc and Morgan Stanley along with tech bellwethers Apple Inc, Texas Instruments Inc and Qualcomm Inc.

The housing sector, which is still struggling in the wake of the worst recession since the 1930s, will be the centrepiece of this week’s economic indicators. In the second quarter, banks repossessed a record number of US homes as unemployment stayed high, according to RealtyTrac, a real estate data company.

U.S. housing starts for June, reported on Tuesday, are expected to slip to a seasonally adjusted annual pace of 580,000 units from 593,000 in May, according to economists polled by Reuters.

On Thursday US existing home sales data are expected to show a decline of 8.1% in June existing home sales versus the 2.2% drop in May, a Reuters poll showed.

As for Europe, the jury isn't yet in there either. On Friday the Stoxx Europe 600 Index declined 1.9% to 248.11, erasing gains for the week, on concerns about global growth and the outlook for European banks.

Investors will eye European bank stress test results to be announced on July 23, a day after Credit Suisse kicks off the earnings season for major European banks.

National benchmark indexes dropped in all 18 western European markets last week except Greece. The U.K.’s FTSE 100 fell 1%, Germany’s DAX gave up 1.8% and France’s CAC 40 dropped 2.3%.

US Treasuries rose for a third day on Friday as concern about the US economy bolstered the appeal of the safety of fixed income securities.

US two-year note yields fell to a record low, dropping for the seventh straight week, amid speculation the Federal Reserve will keep borrowing costs near zero into next year as unemployment persists and consumers remain reluctant to spend.

The benchmark 10-year fell 7 basis points, or 0.07 percentage point, to 2.93% in late trading in New York, according to BGCantor Market Data. It slid 13 basis points for the week.

The two-year note yield declined 2 basis points to 0.59% and touched its lowest level ever, 0.5765%. For the week, it decreased 4 basis points.

Analysts expect the euro's rally over the past month to slow this week ahead of the bank test results.

The US dollar may also be approached with caution ahead of the housing data and what it may foretell about the second half of 2010.

On Friday, the euro rose above US$1.30, an important psychological level, for the first time since May. It has risen 5.7% this month as smooth bond auctions in Portugal, Germany and Greece eased concern about the euro zone's debt crisis.

Signs of a sluggish US recovery and the greenback's diminishing yield appeal have been weighing on the American currency.

The US dollar last traded at 86.47 yen, down 1.1% on the day.

On Friday, oil fell with equities. US crude for August fell 90 cents to US$75.72 a barrel by midday in New York.

London Brent's new front-month September crude oil futures contract was down 86 cents to US$75.23.

Gold also fell on Friday, dropping to its lowest level in more than a week.

Gold prices ended the week almost 2% lower, and the market has been largely treading water after news of massive gold swap operations conducted by the Bank of International Settlements in recent months stirred fears of gold dumping.

Spot gold was at US$1,189.65 an ounce at 2.39pm EDT, against US$1,207.75 late in New York on Thursday.

US gold futures for August delivery settled down US$20.10, or 1.7%, at US$1,188.20.

Businesswire.co.nz

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