Monday, June 18, 2012
In the choice between 'bad' and 'worse' available to the Greeks
in Sunday's election, they made the 'right' call and opted for the
'bad' option. This is a big sigh of relief for Europe and the
global financial system. But don't look for a relief rally today as
the market's attention shifts promptly from Greece to Spain, where
yields on government bonds are rising and reaching unsustainable
levels, requiring some sort of intervention. As such, the positive
aspect of today's trading action is that we were able to avoid a
major or catastrophic negative.
Spanish government bond yields are up above the dangerous 7%
level today, which effectively means a very restrictive capital
market access for the government. Greece, Ireland, and Portugal
needed outside intervention when they reached these levels. Spain's
banking bailout a few days back obviously wasn't enough and G-20
summit getting underway in Mexico today has limited room for doing
anything good.
A major intervention from the European Central Bank (ECB) in the
form of another round of long-term refinancing operation (LTRO)
will most certainly break the negative momentum in Spanish (and
Italian) government bond markets. But the ECB believes that doing
more LTRO will relieve the pressure on Euro-zone political leaders
to take the tough decisions needed to 'fix' the problem, such as
moving towards a banking or fiscal union. The question is whether
Spain has the ability to sustain these above-7% yields while it
waits for Euro-zone leaders to make the right decisions in the
summit meeting later this month.
The ECB is not the only central bank in the spotlight this week.
The Federal Reserve is in focus as we get the official post-meeting
statement from the FOMC on Wednesday followed by Bernanke's press
conference that afternoon. Market participants are looking for the
Fed to do 'something' on Wednesday. But what and how effective that
'something' will be is up in the air at this stage. They could
extend 'Operation Twist' which ends at the end of this month,
extend their interest rate 'guidance', or announce a new round of
quantitative easing or bond purchases. I don't think 'doing
nothing' is one of the options, given how high expectations are
some sort of new Fed action. But we will have to wait till
Wednesday to find out.
Europe and the Fed aside, we have a number of major housing
industry reports coming out this week, including the homebuilder
sentiment index this morning, Housing Starts on Tuesday, and
Existing Home sales on Thursday. We will also start keeping tabs on
second quarter earnings reports this week, with results from
companies like
FedEx
(
FDX
) and
Oracle
(
ORCL
) coming out.
The financial press typically associates the start of the
earnings season with
Alcoa
's (
AA
) report each quarter. But in reality, the earnings
season gets underway before that as many companies have fiscal
quarters that end at different months than the end of the calendar
quarter. For example, Alcoa will release its second quarter 2012
results in July, while a number of major companies whose fiscal
quarters end in May will report before that. We will be counting
results from all the companies with May quarter ends, like Oracle
and FedEx, as part of the second quarter of 2012.
Current expectations are for second quarter 2012 earnings to be
up 2.1% from the same period last year, reflecting a modest 0.6%
revenue increase and a 13 basis point expansion in margins. This
compares to earnings growth of 7.9% in the first quarter, which
reflected gains of 4.7% on the top-line and margin expansion of 21
basis points. Pretty much all of the second quarter earnings growth
is coming from the Finance sector. Excluding Finance, total
earnings in the second quarter will be down 4% from the same period
last year. We will be getting 'second quarter' results from 12
companies in the S&P 500 this week.
Sheraz Mian
Director of Research
ALCOA INC (AA): Free Stock Analysis Report
FEDEX CORP (FDX): Free Stock Analysis Report
ORACLE CORP (ORCL): Free Stock Analysis Report
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