Market Running Out of Catalysts - Ahead of Wall Street

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Monday, May 5, 2014

This market is running out catalysts that can push it higher. The Q1 earnings season is now effectively in the background even though plenty of reports are still to come and the key April economic data is also now out. The earnings picture has been so-so for a while, but many in the market (read: the bond market) seem to have a hard time buying into the improved U.S. economic outlook that recent data seems to suggest. Today's soft data out of China and ongoing tensions in Ukraine add to these worries. No doubt pre-open sentiment is pointing towards a soft start for the markets today.

China's unofficial final PMI survey for April from HSBC Bank ( HBC ) showed modest improvement from the March level, but came short of expectations and the preliminary April read. Importantly, the survey puts the country's manufacturing sector still in contractionary territory, likely indicating that earlier signs of a rebound may have been premature.

There was growing optimism in the market some time back at the government's mini-stimulus announcement where they planned to invest in railroads and offer tax breaks to small businesses. That package doesn't seem to have had much impact at this stage as the final HSBC PMI survey shows a decline from the preliminary April read, though it's probably too early to write-off the effect of that package. But the bottom line is that China's growth outlook is far from certain.

On the Q1 earnings front, we have entered the final stretch of the reporting cycle as the bulk of the reporting season is now behind us. It has overall been a weak season, with growth very anemic, few companies beating top-line expectations and no improvement on the guidance front. As a result, estimates for Q2 have started coming down, a trend that has been in place for almost two years. Hard to envision earnings serving as a catalyst for this market till this forward outlook materially improves.

The Q1 weakness came as no surprise to this market and is not the reason for the market's double-mindedness; it's the uncertain future outlook. After all, market prices reflect future expectations, not current conditions. With margins already in record territory, the only way the earnings picture will change in any meaningful way is if we start seeing stronger revenue growth, which will happen if the global economy will start growing again.

Friday's jobs report and other recent economic readings like the ISM surveys show that we could ignore the shockingly weak Q1 GDP report and look ahead to improved growth momentum in the coming quarters. Even if we ignore the uncertain Chinese outlook, not everyone is buying into the supposedly positive outlook for the U.S. economy either. That's the way how most people will interpret the bond market's reaction to the jobs and other recent U.S. data. One could claim that the bond market is wrong in this, but I have difficulty in making that claim.

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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