Earnings season may give investors reason to be positive

Good morning,

• Chinese HSBC services PMI falls back in September;

• IMF growth revisions spark another round of selling;

• Earnings season may give investors reason to be positive;

• FOMC minutes could cause quite a stir later.

It may have been a bad couple of weeks for the stock markets but it's clearly not over yet as another sell-off yesterday brought about the heaviest fall in more than two month in the US. This carried into Asia overnight as Chinese investors returned from their long weekend to see almost three quarters of a percent wiped off the Hang Seng and it now looks to continue into the European session again, with futures currently pointing to a much lower open.

Part of the Chinese sell-off could be attributed to the weakness seen in the HSBC services PMI reading, which fell from 54.1 to 53.5 for September. This is only a small drop but just provides further evidence of the uphill task facing the Chinese in their attempts to manoeuvre towards a consumption driven economy. Given the stimulus efforts announced last month from the PBOC, investors may be willing to overlook this minor weakness and instead wait to see what impact the new stimulus efforts have on the slowing economy.

The catalyst for the global sell-off on this occasion appears to be the IMFs decision to revise down global growth forecasts for this year and next by 0.1% and 0.2%, respectively. This has hardly come as a great shock given the crisis in the Ukraine and the impact it's had on a number of countries, not to mention the overall slowdown in the eurozone and the fact that we recently saw similar revisions from the OECD. What really didn't help was the fairly pessimistic language in the IMF comments, with the organisation using words such as "weak" and "uneven" to describe the current global economic recovery.

That's not to say what they're saying isn't correct because it absolutely is, but the markets appear to be very sensitive at the moment and it doesn't take much to get a reaction. This is effectively just the straw that broke the camels back. It says a lot about how investors perceive the levels that we've been trading at if everyone's fingers are on the trigger and at the first sign of negativity, we get heavy selling.

On the bright side, with earnings season unofficially beginning today, investors may find more reason to be positive again, at least for the next month or so. Wall Street has a tendency to go into earnings seasons with low expectations making it quite easy for companies to have a better than expected quarter. That said, we have seen some improvements on the revenue side of things this year, which could continue into the third quarter. For a long time, investors were focused predominantly on earnings growth, regardless of what was driving it. Now that we're seeing more organic growth, investors may be less willing to accept earnings growth that is still being driven solely by cost cutting efforts.

Today is expected to be very quiet in terms of economic data, particularly in Europe, which means the focus is likely to remain largely on the US. Not only is it the start of earnings season, we also have the release of the FOMC minutes from last month's meeting coming later on this evening, which could cause quite a stir in the markets.

Ahead of the European open, the FTSE is seen 29 points lower, the CAC 25 points lower and the DAX 58 points lower.