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Week in Focus

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JP Mor(gain)…but pain elsewhere…

Mon, Oct 19 2009, 07:49 GMT
by RANsquawk Research Team

RANsquawk

Please feed the “bears”… 

The rally in stocks continued last week, albeit at slower pace, after earnings from financial heavyweights both surprised and disappointed, however pitiable report from GE on Friday toppled investor confidence and prompted broad based profit taking. As such, the economic reports are likely to take backstage this week and instead the focus will turn to earnings. This week will see around 30% of S&P 500 conglomerates update investors on their trading performance and more importantly reveal the outlook for the future, with the centre stage taken up by the likes of Apple, Microsoft, Boeing and Caterpillar. 

The Dow Jones breached the 10,000 mark last week and due its psychological importance may act as a buy signal for retail investors, which have so far, seem to have avoided the run up in stocks. In turn, the growing confidence, coupled with abundance of liquidity and feeling of regret from those who missed on the rally may propel indices another leg higher. However, the “bears” will point out that the rally was largely driven by government’s stimulus, as well as desperate downsizing by the corporations as they seek to return to organic growth. As such, investors are unlikely to be convinced in the sustainability of this rally until more meaningful top and bottom line numbers become a norm. Until then expect the “bears” to have a field day… 

JP Mor(gain)…but pain elsewhere… 

To no surprise, JP Morgan surpassed the Wall Street estimates and posted mind-blowing Q3 earnings, with strong performance noted across all units. However, the euphoric mood was sobered somewhat by comments that the bank doesn't expect improvement in consumer credit until unemployment and declining home prices reverse course. Also, despite all the measures taken up by the Fed and the US government, the financial system remains very fragile, as illustrated by earnings from both Bank of America and Citigroup, which were unable to live up to expectations. To conclude, the two areas of concern throughout the entire rally off March lows was bleak consumer attitude and commercial real estate sector. This week will see majority of the regional banks report, which are thought to be loaded with sour commercial real estate loans. This leads to believe that one should expect more pains than gains in the financial system in near future. 

The trend is your friend…

As the focus is firmly on the corporate front, the economic data scheduled for the release this week is unlikely to be the main driver. Still, there are some market moving events one should be aware of. 

In the US, households have been supported by one or the other government run programs, be it the cash-forclunkers or support for first-time home buyers. In turn this is aiding to the turnaround in the housing market which was in perils not too long ago. Housing starts, building permit, as well as existing home sales are all expected to edge higher. Also the NAHB housing market index is likely to see a further upward shift. Elsewhere in the US, the Fed’s Beige book is expected to echo a more upbeat tone than the previous report, with likely comments that consumer spending has improved but labour market remains under pressure. 

In Europe, both manufacturing and services PMIs are expected to show slight improvement. The German IFO is too seen posting modest gains. In the UK all eyes will be on the Q3 GDP and with PMI survey suggesting growth finally turned the corner, there is a risk of substantial sell off in stocks should the data disappoint. The Bank of England will release the minutes of the latest rate setting meeting, which will shed light on its thinking on the effectiveness and likely future plans on its QE program. The program is due to run out at the end of the month, so the market participants will be looking for clues as to whether the MPC will extend the programme in November.
Finally, despite similarities between the Canadian and Australian economies, the Bank of Canada is not expected to follow its counterpart down under and refrain from hiking rates just yet. 

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Published on  Mon, Oct 19 2009, 07:57 GMT