Its difficult to know what the main story is going to be this week. There’s a lot going on before we embark on a Olympic fortnight here in the now sunny London after the what was (hopefully past tense) the wettest early summer on record. I’m still recovering from the shock of having two low flying and incredibly noisy military helicopters skim over my house (near Guildford) on Friday night. I thought I’d missed the news on my commute home that we were now at war. Only when I turned on the TV did I realise that this was the final journey of the Olympic torch into London ahead of this Friday’s official opening ceremony. Before all this there is so much to consider this week from a macro perspective that by the end of it we might be more tired than Bradley Wiggins. Anyway before we delve into the details, which of the following will be the most important story this week?
Will Spain’s record Euro-era 10yr yield high (7.27%) on Friday dominate? Will speculation that the IMF is losing faith in Greece and is tempted to pull the plug (Der Spiegel) dictate the agenda? Or will the mood be data related as we have the crucial flash PMIs (Tuesday), an important first read of US Q2 GDP (Friday) and an ECB lending survey (Tuesday) that may have implications for their next monetary policy moves. Or maybe the first peak US earnings week will dominate?
We’ll preview these in full below but Asia has started the week on the back foot as the market digests current Spanish and Greek issues. In equities, the S&P 500 Futures are down -0.5% while the Hang Seng and KOSPI are both over 2% lower as we type. The Nikkei (-1.3%) is down for the second successive session with Fitch’s downgrade of Japanese banks overnight not helping. Not surprisingly the EUR is trading lower at around 1.211 against the Dollar and has also touched an 11-year low against the JPY. In credit, the Asia IG and the Australian iTraxx indices are 7bp and 10bp wider respectively. Copper and Brent are both around 1% lower overnight.
Back to Spain, the 60bp and 26bp spike in its 2yr and 10yr government bond yield on Friday came on the back of Valencia’s request for central government support. This selloff came despite the widely expected approval of Spain’s MoU on Friday. Although this
was in line with the earlier leaks, the exact size of the loan will only be determined in September pending detailed individual bank stress tests. The loans will be fully disbursed by the end of 2013 so its fair to say that the recap is probably not moving as quickly as markets were hoping for. Spanish financials sold off sharply on Friday which helped the IBEX (-5.82%) post its biggest one day fall in since May 2010. Over the weekend the El Pais said Valencia will request more than EU2bn in aid from the recently launched fund for troubled regional governments. Overnight also saw Spain’s eastern region of Murcia deny reports of a bailout request but El Pais noted that Catalonia may follow Valencia asking for a bailout from.
So all eyes on how Spain trades this week after Friday’s record high euro-era yield close. In fact as well as the yield issue, Spain’s 10-year closed at a fresh wide of 610bps against Bunds on Friday. Worrying times. We have a Spain bills auction scheduled tomorrow followed by some Italian auctions later this week.
Equally concerning is a story by Der Spiegel saying that the IMF is considering ending its support to Greece, raising the risk that the country will become insolvent as early as September. According to a translated version of the report cited in the ekathimerini, “High ranking officials at the Fund have informed the European Union that the IMF is no longer willing to provide Greece with more aid”. IMF’s patience with Greece is reportedly wearing thin as the Fund is said to be very pessimistic about Greece’s ability to reduce its debt/GDP ratio to 120% by 2020. The same article apparently also reported that euro area leaders regard a Greece euro exit as manageable even though they still want to support the country until the ESM is in operation. German Economy Minister Roesler said overnight that he had “great scepticism” that Greece would be able to fulfill its MoU commitments and added that if Greece does not fulfill its obligations, there shouldn’t be any new aid.
Troika officials will resume their review of Greece’s progress tomorrow but the final report is not due until September. This raises questions around the ability to redeem the EU3.2bn Greek bond, due on 20th August and held by the ECB. According to the FT, Greek officials have hinted at the possibility of a bridge loan but EU officials have been resistant. A senior EU official said Greece is
likely to be forced to raise money on the short term bills market to bridge this gap. The ECB’s announcement on Friday that it would stop accepting Greek bonds as collateral for the time being is also viewed negatively by the market. The ECB said it will re-assess the eligibility of Greek collateral after the Troika’s review.
Looking at the week ahead, on the micro side US earnings season will hit an activity peak this week. 172 companies or about 37% of the S&P 500 market cap are expected to report. In the Tech space Apple on Tuesday and Facebook on Thursday are the highlights. Facebook’s share price has fallen around 24% since its IPO and the analyst community have also reduced the company’s growth prospects since then so its debut earnings call will certainly be of keen interest for the market. Away from techs, Texas Instruments (today), UPS (Tuesday), and Exxon Mobil (Thurs) are some of the big names this week. In Europe we are expecting about 150 Stoxx600 firms to report with Siemens and Barclays being some of the major names.
Taking a closer look at the reporting season so far we’ve updated our usual earnings and revenue beat:miss summary table in the PDF. In the US a total of 94 S&P 500 firms have reported and the EPS beat:miss ratio is running at a strong 76%:22% (2% in line) which is slightly higher than the 5-year average beat rate of 74%. Sales revenue performance has been weak so far though with just 44% topping analyst estimates (56% miss) and this could become a main theme for this season and is perhaps more reflective of the underlying economic weakness we’ve been seeing in recent months. Looking at this trend since the crisis started 5 years ago the average beat ratio for revenue is around 61% so we are sharply below that. The divergence between earnings and sales beat has also not been so sharp since Q1 2009 with EPS beats exceeding revenue beats by around 32 percentage points so far.
Its early days in Europe but sales performance is actually stronger than EPS with 69% of the 48 companies reporting so far beating on the former. The EPS beat:miss ratio is 49%:49% (2% in line).
Now to the data, as already discussed its a big week. The focus in Europe will likely be on the flash PMIs for the region as well as France and Germany’s number on Tuesday. The first Q2 GDP reading for the UK is due on Wednesday and markets are expecting the economy to remain in recession with expectations at -0.2%/-0.3% QoQ/YoY. Germany’s IFO surveys and the ECB bank lending surveys on Wednesday are also key with the latter a good update on credit creation in the Eurozone and it may help shape the ECB’s near-term thinking. A Global Investment Forum will be held in the UK on Thursday ahead of the Olympics this Friday. Draghi, King, Lagarde, HSBC’s CEO, and Google’s Chairman are some of the scheduled speakers.
In the US the Markit PMI is out tomorrow and it will be interesting to see if this now follows the ISM below 50. In reality though a lot of attention will be on the first reading of the Q2 GDP on Friday. The market is expecting the US economy to grow at an annualised rate of 1.4% in Q2 which would be down from 1.9% in Q1. We are still experiencing one of the slowest recoveries in history which is worrying given that this one has seen the greatest amount of stimulus on record. Elsewhere in the US we have new home sales on Wednesday and durable goods orders on Thursday. The US Treasury is scheduled to sell $99bn of 2s, 5s and 7s starting over the week starting from Tuesday. So a busy week.
Jim Reid
Strategist
Colin Tan, CFA
Research Analyst
Deutsche Bank
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