US inflation and earnings in focus today

Good morning,

• Reports that 11 banks will fail stress tests weigh on Europe;

• ECB considering buying corporate bonds as it aims to increase balance sheet to €3 trillion;

• BoE more dovish despite two members still voting for rate hike;

• US inflation and earnings in focus today.

It’s been a mixed start to the trading session in Europe as investors look to digest a raft of earnings, reports that 11 banks will fail stress tests this weekend and dovish Bank of England minutes.

While the general tone in the markets has been more positive this week, investors remain on edge particularly when it comes to the eurozone. Reports this morning suggested that 11 banks from six countries will fail the stress tests when the results are released this weekend. The ECB has refused to comment on these reports which will only add fuel to the fire and could spur more risk aversion towards the end of the week.

While the banking system is more secure than it was back in 2011, the contagion risk that caused so much concern throughout the eurozone crisis could return if investors aren’t convinced by the results. We’re already seeing these reports weighing on sentiment in Europe this morning, it will be much worse if the results are disappointing, especially if any big banks at the core fail.

Potentially offsetting this is the reports yesterday that the ECB is planning to discuss purchasing corporate bonds on the secondary market in another attempt to improve liquidity in the eurozone. For me, this is just another sign that the ECB will do anything to avoid quantitative easing which has worked so well in other countries. That said, from an investor standpoint, it is encouraging to see the ECB making efforts to increase credit availability and tackle one of the many problems in the region. The ECB is clearly determined to expand its balance sheet back to the €3 trillion level it was at back in 2012 and that is encouraging. It has been criticised for so long for doing nothing, it may not be doing QE still, but it’s certainly making a big effort.

The minutes from the October Bank of England MPC meeting were released this morning and while the voting remained unchanged, with only Martin Weale and Ian McCafferty voting in favour of a rate hike, there was clearly a more dovish tone to the committee. They particularly highlighting the deterioration in the eurozone economy, which the UK is very exposed to with it making up about half of its trade. On top of this, inflation in the UK has fallen another 0.3% since the meeting to 1.2%, the lowest level in five years. This can only make the first rate hike less likely and could even have an impact on the voting next month, swinging it more in favour of those wanting rates to remain at 0.5%.

The focus during the US session today is likely to be on earnings and inflation, with the latest CPI data for September being released. It should be noted that this is not the Fed’s preferred measure of inflation and should therefore only be seen as indicative of any change we could see in the core personal consumption expenditure price index. That said, it is unlikely that any big change here, similar to what is being seen in the UK, wouldn’t be reflected in the core PCE number. One thing that may weigh on the inflation reading is the appreciation of the dollar over the last few months.

On the earnings front, we’ll get results from 33 S&P 500 companies including Boeing, AT&T and GlaxoSmithKline. Earnings season has been quite impressive so far and is probably partially responsible for the recovery in stock markets this week. So far, 67% of companies have beaten earnings expectations, which is roughly in line with the average, while profit growth expectations have been revised higher for the third quarter.

The S&P is expected to open 1 point lower, the Dow 15 points lower and the Nasdaq 4 points higher.