World Week Ahead: US earnings, downgrade fallout

Monday 16th January 2012

Friday's downgrade by Standard & Poor's to credit ratings of France, Austria and several other euro-zone countries, while not unexpected, fuelled concern about Europe's ability to deal with its fiscal crisis.

Case in point was that Greece's creditor banks suspended talks over disagreement with the government about the size of the haircut investors have to take by swapping their bonds.

Talks are set to resume on January 18 as the debt-laden nation desperately tries to stave off default.

“The sticking point is actually coming down to what the interest rate would be on the new bond,” Hans Humes, president of Greylock Capital Management and a member of committee negotiating the deal with the government, told Bloomberg.

If the talks fail and Greece defaults, “there will be a lot of contagion,” he said. “The ball is in their court. If you want to do something to head off what could be a disorderly process, now’s the time.”

In Europe, the Stoxx 600 ended the week with a 0.7 percent advance, closing before S&P announced its downgrades.

Solid demand for debt auctions in Spain and Italy last week helped drive borrowing costs for the struggling nations lower but that might be a different story in the coming days.

Wall Street dropped on Friday, though the major indexes closed the week ahead. In the past five days, the Nasdaq Composite Index advanced 1.4 percent, the Standard & Poor's 500 Index rose 0.9 percent and the Dow Jones Industrial Average added 0.5 percent.Disappointing data on US jobless claims and retail sales failed to dampen the cautious optimism on the American economic recovery.

"There are signs that last year's mild recovery might be strengthening now, and it is broad-based," JPMorgan Chase CEO Jamie Dimon said at a conference call with journalists on Friday after the bank posted fourth-quarter revenue that fell short of expectations, though its earnings were in line with forecasts.

Eyes will be firmly on this week's earnings reports, including from Bank of America, General Electric, Intel, Goldman Sachs Group and Microsoft.

"We're going to see more volatility in the weeks ahead with tension between earnings and Europe," Christopher Sheldon, the Boston-based director of investment strategy at BNY Mellon Wealth Management, told Reuters.

"We want to see Europe resolved, but there will continue to be ups and downs, and while earnings will continue to be relatively good, we do expect slowing compared with 2011."

Investors will watch the latest results for fresh clues on how Europe's slowdown is affecting American corporate profits.

"Banks will be an important part of the story, especially with Europe in the picture, and investors will also be looking at names like GE, which have global exposure, to see what insights can be gleaned from that," Hank Herrmann, chief executive of Waddell & Reed Financial in Overland Park, Kansas, told Reuters.

On the US economic front, this week brings the New York Fed's January manufacturing data, December readings on inflation from the producer price index and the consumer price index, as well as December housing starts.The euro continues to suffer, weakening for a sixth straight week against the greenback, according to Bloomberg. It's going to be another tough one too.

In Europe this week, some of the nations that were downgraded by S&P are scheduled to auction more debt; France and Spain plan to sell bonds and bills, while Belgium and Portugal will auction bills.

Any rating downgrades would mean the pending auctions are “not going to be pretty,” Lyn Graham-Taylor, a fixed income strategist at Rabobank International in London, told Bloomberg before the S&P announcement.

S&P slashed the ratings of France, Austria, Malta, Slovakia and Slovenia by one notch, and cut those of Italy, Portugal, Spain and Cyprus by two notches.

There's a risk that France could see its rating downgraded again, the ratings agency warned, though it said it was not considering a breakup of the single currency area and that such a scenario was not being factored into its ratings decisions.

"The deficits could increase from the relatively high levels where they are already and reach certain thresholds in the general government debt and deficit ratios, which might lead to another lowering of the rating," S&P credit analyst Moritz Kraemer told a conference call, Reuters reported.

S&P's downgrade left Germany, the Netherlands, Finland and Luxembourg as the only euro zone countries with the top AAA rating.On Monday, American markets are closed for the Martin Luther King Jr holiday.

(BusinessDesk) 09:24:06

BusinessDesk.co.nz

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