Global Weekly: Earnings season not so bad

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Equity markets have had a good week, with on average a 1% increase for the American S&P500 and the European Stoxx 600. In the US the IT, industrial and consumer discretionary sectors outperformed with 1 to 2%. In Europe, the energy and health care sectors returned 2 to 3%.

The market is now fully focused on the earnings season. In the S&P500 index, around 60% of the companies have reported - in Europe around 30%. As the macro economic data in December deteriorated substantially and the trade war lingered on, many feared for the company results. Although many companies still have to report, the incoming company results for the last quarter are not so bad.

The US earnings were in the last eight quarters on average 4 to 7% higher than expected. Over the last quarter, results exceeded expectations on average by 3%. Albeit somewhat lower, in light of the challenging environment, it is reasonably good. Companies experience some margin pressure as the US wages continue to rise faster than inflation. Second, some companies report lower margins as a result of increased costs in their supply chain due to the higher tariffs imposed by the US and China.

In Europe, it is still too early to draw conclusions, but sales are coming in 2% lower than expected. The European economic deterioration is mentioned by companies as one of the reasons. Especially in Germany where the auto industry is experiencing a strong drop.

The biggest positive surprises last week came from the social media, with Facebook and Snap reporting robust growth in regular users, resulting in 15 to 25% stock jumps. Also, Estee Lauder reported strong sales on the back of its high-end facial creams. Sales also were strong at the market leader in catering, Compass. Both stock prices jumped 7%. In the financial sector, ING surprised with a good solvency ratio and strong earnings, resulting in a 7% stock price increase.

On the other end, some of the biggest misses came from game company Electronic Arts, that had to lower its guidance due to stiff competition from the popular Fortnite game. The stock went down 13%. Coming week, all eyes will be on a wide variety of companies reporting their results, such as Equinix, Schneider, NN Group, Allianz, Heineken, Nestlé, PepsiCo and Baidu.

Bonds: China the swing factor?

Core government bond yields decreased since the summer of 2018. This could be linked to a global synchronized low growth environment. As a consequence, yields should remain at their low levels for the time being, with 10-year US Treasuries around 2.70% and 10-year Bunds at 0.13%.

In contrast, risky assets have seen more volatility, particularly in the last quarter 2018, but now have started to recover. Sentiment, however, still seems less confident than one year ago. Investors remain nervous about the slowing global growth momentum, as profitability of corporates looks less impressive than previous data, and debt burdens are still high. We hold on to our preference for investment-grade corporates versus high-yield corporates.

In this environment, China could be the swing factor, as its economic outlook is not that clear. China is slowing and it seems that the country could slow even further. Next week, China will release its January trade and financing data. Both should give an update on the Chinese economic status and its stimulus programme. The Chinese slowdown will have an impact on the global growth picture, but it is not clear how this will impact the slowing growth momentum in Europe and the rest of the world.

In the US, a looming second shutdown, US debt ceiling, and summits with China and North Korea are mainly linked to political agendas. In Europe, there is uncertainty around Italy and the Brexit. Concerning Italy, Fitch will review the country’s credit rating on 22 February. Currently, it is BBB, but with a negative outlook. Furthermore, the upcoming European Parliament elections in May could result in more populism in Brussels. This could impact EU policy going forward. Politically driven agendas could have different outcomes and therefore, investor sentiment is more vigilant.

The most important driver for risk sentiment will be the markets’ continued comfort level with the stance of monetary policy makers. They have become more reluctant on further tightening in recent weeks. Now that economic cycles have become smoother and less forward-looking, this leaves sentiment to be a key driver of market volatility.

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