Wait-and-see approach taking over

US earnings season continues to deliver as expected – estimates have been low. However, 79.8% of those companies that have reported have beaten earnings per share estimates, and 60.5% have beaten revenue estimates.

US earnings
Source: Bloomberg

Interestingly, the word ‘efficient’ is creeping into talk off the street, having seen 8.8% EPS aggregated growth in the third quarter, compared to just 4.1% aggregate growth in revenue. US companies continue to look for growth where possible and structural efficiency is a very good place to start. However, as we’ve seen in corporate Europe, Asia and Australia, efficiency has a finite end. Growth will have to come from the revenue line sometime in the future to sustain forecasts.

On the current numbers, the US remains the bright spot of global growth judging by third quarter earnings and the forward guidance. This explains the S&P’s best trading week since January 2013 (+4.1%).

Looking to the next few months of trading, there might be a slightly different feel to global markets. The main block of US earnings season is now in its final week and Wednesday night’s FOMC meeting looms large in the market’s psyche. Trade overnight had a very distinctive feeling of ‘wait and see’. The VIX index lost over 27% last week, but that will no doubt reverse over the coming few days as the Fed meeting approaches.

With the end of the asset purchase program a foregone conclusion, speculation is once again mounting about the movement of interest rates. The most watched two words in the financial world - ‘considerable period’ – continue to dominate financial commentary and The Street. Despite the fact the Fed’s dual mandate is being met, with inflation in line and employment above the target range of 200,000 jobs added per month, wage growth remains benign. Home sales are also fluctuating and manufacturing is patchy.

Outside of the US, growth is a real concern as Europe remains at the centre of attention. German growth in the second quarter reversed. However, the Eurozone’s largest economy continues to hold the line on its current course of non-intervention policies. If Germany was to contract further, the effect on Europe would be dire and the possibility of recession will only amplify. The Eurozone remains the biggest threat to global growth.

All of this leads me to believe the ‘considerable period’ will remain. The softly, softly approach from Janet Yellen, coupled with Fed speak over the past few weeks, all lead me to conclude it will remain. We should therefore see tightening fears relaxing in 2014 before gearing up again for 2015 as tightening takes hold.  

Ahead of the Australian open

The ASX has had a meteoric rise over the past two weeks, retracing over 50% of the recent pullback. It has crossed back above the 200-day moving average and has only experienced one negative trading day in the past ten. Having seen a slightly negative lead from the US and a poor night in Europe, we’re currently calling the ASX 200 down 16 points to 5442.

However, the banks are likely to continue to be bid up heading into their results at the end of the week. Considering the bizarre disclosure issue from ANZ, it’s hard to call the reaction we will see on the open. As the unaudited numbers look in line with estimates, it’s up to the market to see how it reads this mistake.

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