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China Cuts Reserve Requirements - Ahead of Wall Street

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Monday, April 20, 2015

The market-friendly measure out of China should help overcome Greece-centric worries and give us positive start to today's session. A couple of good earnings reports this morning should help sentiment.

In a key stimulus measure from the People's Bank of China, the central bank is cutting reserve requirements for banks in a big way. The full percentage-point drop in reserve requirements is roughly double what market participants expected and is the biggest since 2008 and is aimed at increasing the availability of credit in the economy.

This move shows that the Chinese authorities aren't concerned about the country's red-hot stock market, which this liquidity-boosting measure will further strengthen. They seem more concerned about the economy's growth trajectory, which has been losing ground lately. This is not only a big boost to Chinese stocks, but is a net positive for equities all over the world as it will ease growth worries about China.

The only dampener to the Chinese news is the Greek situation, with final negotiations concerning that country's status reaching a critical phase this week - this coming Friday is cited as a critical date in that regard. The sharp rise in Greek government bonds and the corresponding drop in German bunds is a reflection of this uncertainty.

There appears to be growing unanimity among Greece's German-led creditors not to give in to Greek demands. This is bringing back 'Grexit' discussions all over again, though the issue seems to have lost a fair amount of its contagion compared to a couple of years back when the country's exit from the currency union was seen to be posing a big threat to the region's banking system.

Hard to handicap which way the issue will move in the coming days, but the steady move into safer instruments as a result of this uncertainty is pushing 10-year German bunds to the '0%' level. The downtrend in German government yields isn't solely due to Greece; they are also responding to the ECB's QE program.

On the earnings front, we have a number of positive-looking reports from Morgan Stanley ( MS ), Hasbro ( HAS ) and even Halliburton ( HAL ). Unlike the steady stream of top-line 'misses' this earnings season, all three of these companies came ahead of not just EPS estimates but also revenue expectations.

Including these reports, we now have Q1 results from 66 S&P 500 members that combined account for 20.7% of the index's total market capitalization. This is a big week on the Q1 reporting docket, with 140 S&P 500 members reporting results.

Total earnings for the 66 S&P 500 members that have reported results are up +14% on +3.8% higher revenues, with 77.3% beating EPS estimates and 32.7% coming ahead of top-line expectations. The earnings growth rate and earnings beat ratio is pretty good relative to what we have seen from the same group of companies in other recent quarters, but the revenue growth and revenue beat ratios are on the weak side. Keep in mind, however, that the strong earnings growth rate at this stage is thanks mostly to the Finance sector, which itself is a reflection of easy comparisons at Bank of America ( BAC ).

We will get a clear picture in the coming days as more companies report, but the growth picture is fairly underwhelming at this stage. The revenue weakness is particularly notable.

Sheraz Mian

Director of Research

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.


The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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