World Week Ahead: Apple, Facebook, US GDP

Monday 23rd July 2012

A big week of US earnings including Apple's will set the tone for equities, while an estimate for US economic growth will also help determine the mood.

Last week brought results including from IBM and eBay that kept alive the trend of companies surpassing expectations, especially when it comes to profits. It has helped offset a slew of data showing that the strength in the world's largest economy is wavering in the same week that Federal Reserve Chairman Ben Bernanke reiterated US policy makers were ready to act if needed, but stopped short of announcing new measures.

Indeed, Commerce Department data due on Friday is expected to show that growth slowed to a 1.4 percent annualised pace in the period from April to June, according to the median forecast of 66 economists in a Bloomberg News survey. That would be the most tepid growth rate since the 1.3 percent recorded from April to June last year.

In the past five days, the Dow Jones Industrial Average gained 0.4 percent, as did the Standard & Poor's 500 Index.

Profits have surpassed analyst forecasts at about 73 percent of the 118 S&P 500 companies that have reported quarterly results so far, according to data compiled by Bloomberg. Still, many estimates were downgraded in the last few months.

Apple's results are due on Tuesday, while Exxon Mobil, Facebook, Texas Instruments and Amazon are also among the US companies set to announce their latest earnings in the coming days.

While profits are by and large better than expected, the growth in revenue is lacking.

Out of 116 companies that have reported so far, only 43 percent of companies exceeded revenue expectations, according to Reuters.

Demand for US Treasuries will likely remain strong as investors continue to seek refuge from the turmoil in Europe. On Friday, the yield on the five-year US note dropped to a record 0.5684 percent.

"Everybody still views the US Treasury market as the safe haven," David Coard, head of fixed-income trading in New York at Williams Capital Group, a brokerage for institutional investors, told Bloomberg. Yields "could be driven even lower. It's what's going on in Europe again, it's this fear."

That bodes well for the US Treasury's auctions of a combined US$99 billion of two-year, five-year and seven-year debt over three days beginning July 24.

The concern over Europe's ongoing sovereign debt fiasco was reflected in the euro which hit a two-year low against the greenback on Friday, as Spain's 10-year bond yields rose above 7 percent again -- in large part because the regional government of Valencia asked Madrid for financial help.

European Central Bank President Mario Draghi said the euro is here to stay. Asked in an interview with France's Le Monde newspaper if the euro were in danger, Draghi said: "No, absolutely not. We see analysts imagining the scenario of a euro zone blow-up."

"They don't recognise the political capital that our leaders have invested in this union and Europeans' support. The euro is irreversible," Draghi said.

This week officials from the ECB, International Monetary Fund and European Commission return to Greece to decide whether to release more funds from a 130 billion euro rescue package.

In the past five days, Europe's Stoxx 600 Index gained 0.8 percent as investors drew heart from better-than-expected corporate earnings in this region too. It's the index's seventh consecutive weekly gain, the longest streak in more than six years, according to Bloomberg.

Of the 51 European companies that have reported so far, earnings per share have on average been about 1.2 percent above consensus forecasts, according to Reuters, citing Exane research.

"It's too early for complacency, but the omens are encouraging," Graham Bishop, senior equity strategist at Exane BNP Paribas, told Reuters.

In the past five days, benchmark stock indexes in Germany, France and Switzerland advanced while those in the UK, Spain and Italy fell.

Meanwhile, China's growth pace might ease to 7.4 percent this quarter from a year earlier, an adviser to the country's central bank said, according to Bloomberg. China's GDP grew 7.6 percent in the three months ending June, the slowest pace in three years.

The possibility of a "short period" of deflation in the world's second-largest economy can't be ruled out, Song Guoqing, an academic member of the People's Bank of China monetary policy committee, said at a forum in Beijing on Friday.

Due on Wednesday is the latest data on the UK economy, which is expected to show a contraction for the third consecutive quarter. Gross domestic product is expected to decline 0.2 percent in the second quarter, after shrinking 0.3 percent in the first quarter and 0.4 percent in the final three months of 2011.

BusinessDesk.co.nz

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