25th July 2017

Rathbones weekly review: Yearning for earnings

Earnings season kicks off this week with scores of the world’s largest companies producing results.

Alphabet, Amazon and Facebook will report in the US following a resurgence in fortunes for technology stocks generally. After a couple of months lagging behind a banking-led cyclical rally (since cooled by lower US interest rate expectations), these behemoths have roared back in recent weeks. For their rise to continue, investors will be expecting punchy things from this week’s reporting.

Analysts are hopeful that European companies are on a path of double-digit earnings growth for the rest of the year. If so, it would be the first full calendar year of consecutive quarterly earnings growth since 2011. Europe has performed well so far this year, with strong economic data and a wave of optimism from newly minted French President Emmanuel Macron. However, the share market’s buoyancy has been punctured somewhat as the run of good news led to fears of monetary tightening. Over the past three months, the euro has soared 6% against a trade-weighted basket of currencies and 7% against sterling. This currency strength has held back European indices in euro terms, especially last week as the Euro Stoxx slumped 2.0%. For this stock market rally to continue, higher earnings must continue flowing. Eyes will also be on European GDP figures, which are due on Friday.

UK companies will also be announcing numbers. This will be a great opportunity to gather more colour on how British businesses are faring. It has been a long quarter, with disappointing consumer data and worrying political news. Whether this will flow through to difficult trading is yet to be seen, but company commentaries should help investors get their bearings.

Source: FE Analytics, data sterling total return to 21 July

Calming the storm

Last week, the European Central Bank tried desperately to convince bond markets that it wasn’t preparing to reduce bond purchases. This week it’s the US Federal Reserve’s turn to try to soothe a global market that is becoming more erratic and fearful.

It should be an easier day out for Fed Chair Janet Yellen today, as rate expectations have been pushed out to December or early next year. Still, she will be extremely cautious with her words. American economic data have hit a bit of a dull patch, driving treasury yields lower along with the dollar. A turnaround in several measures, along with an in-any-way-hawkish statement could send investors into reverse, selling treasuries swiftly as they reassess the Fed’s interest rate path.

The US manufacturing PMI, released on Monday, made a comeback after several months of weakness. The flash reading for second-quarter GDP is released on Friday. Consensus estimates are for an annualised figure of 2.6%, higher than the previous two quarters.

The UK takes a GDP pulse-check today: second-quarter growth is expected to tick up to 0.3%. The outlook for Britain appears pretty glum. The International Monetary Fund (IMF) cut its 2017 growth forecast for the UK by 30 basis points to 1.7%, the largest downgrade of advanced economies. That came after a miserable week of Brexit negotiations. The one searing light of clarity from Continental talks? They won’t be done and dusted in two years.

Bonds

UK 10-Year yield @ 1.18%

US 10-Year yield @ 2.24%

Germany 10-Year yield @ 0.51%

Italy 10-Year yield @ 2.07%

Spain 10-Year yield @ 1.46%

Julian Chillingworth
Chief Investment Officer

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