Markets to focus on corporate earnings this week

There were few strong economic reports last week. Perhaps the most impressive print was the U.S. Initial Jobless Claims, which fell to 350,000, but the bounce from this data was tepid at best.

We did see the minutes from the last FOMC meeting, but all they did was confirm what we already know – that the U.S. economy is slowing and that further fiscal stimulus is needed.

The situation in Europe didn’t improve, but it didn’t get any worse, either. Spain did steal headlines mid-week when Euro finance ministers decided to give Spain until 2014 to meet debt-to-GDP targets.

But Spain also introduced a new round of austerity, which includes raising its Value-Added Tax to 21%.

On the corporate front, Alcoa kicked off Q2 reporting season in the United States with mixed results that saw investors selling the next day.

JPMorgan Chase also reported earnings and investors were not surprised that the initial $2-billion hedging loss from May is higher than expected. U.S. earnings reports will be coming at us fast and furious this week.

The Canadian stock market came under pressure earlier in the week as sentiment remained poor for commodities. However, by week’s end we saw some U.S.-dollar weakness, which helped crude oil’s recent rebound.

Gold prices managed to regain lost ground. With commodity prices being neutral or marginally positive, the loonie managed to finish the week higher, finding greater support above the US$0.98 level.

CHINESE GDP GROWTH SLOWING

One of the most anticipated economic releases last week was the second-quarter Chinese GDP report. The Chinese economy expanded by 7.6% year-over-year compared to economist estimates of 7.7% and the 8.1% growth posted last quarter.

The decline in GDP growth has been well telegraphed recently as the People’s Bank of China cut interest rates twice in the past month. As usual, people are questioning the accuracy of the data; however, it’s clear Chinese growth is nowhere close to what it was last decade.

China is going through some growing pains as it tries to manage the remarkable growth from years past, but the good news is that it still has both fiscal and monetary tools at its disposal to stimulate growth. We do not believe the Chinese growth story is over, but we do recognize it will not be as strong as it once was.

TRADING WEEK AHEAD

U.S. earnings season will get into full swing and the market will finally have a chance to focus attention on corporate results instead of the broader macroeconomic outlook for the global economy.

While saw a few results out of the U.S. this week, we will see results coming in with greater frequency amongst some of America’s largest companies.

In fact, almost a third of the 30 Dow Jones Industrial Average components will report including Johnson & Johnson, Coca-Cola Co, Intel Corp, Bank of America, American Express, IBM, Microsoft Corp, Verizon Communications and General Electric. Corporate news out of Canada will remain quiet until the following week when reporting season north of the border starts to pick up momentum.

The economics calendar is fairly busy in the U.S. and we’ll see a number of statistics that will gauge consumer behavior and U.S. housing. Retail sales were released today, while the housing industry will see information concerning Housing Starts, Existing Home Sales and the NAHB Index. The NAHB is off its recent lows, but still expected to struggle around the 30 level (100 = great, 0 = horrible).

The Consumer Price Index will be one of the few statistics revealed in Canada next Friday and the Bank of Canada will be paying close attention to it when it announces a rate decision on Tuesday. Since inflation has recently been subdued, there is very little chance that we see any change in Canadian interest rates. Combine low inflation with global economic headwinds, and it’s almost guaranteed that rates remain unchanged.

With few economic indicators expecting to easily surpass expectations next week, we may see a relatively flat week for the U.S. dollar, unless a negative development out of Europe takes the Euro lower. As such, we may not see considerable movement amongst commodity prices in the immediate term.

Gareth Watson is the Vice President, Investment Management & Research at Richardson GMP in Toronto. This team of research experts is responsible for monitoring and interpreting economic, geo-political situations, current market environments and trends. @Gareth_RGMP