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Monday, October 24, 2011

Market optimism about the European situation refuses to die down despite the delay in the agreement on a comprehensive plan out of the weekend summit meeting. The expectation now is that the plan will get unveiled at another summit meeting on Wednesday. We also have a number of key economic reports on the domestic front coming out this week, with the first read on the third quarter GDP report as the most significant.

Euro-zone leadership appears to be coming around to the realization that the current unsettled situation carries serious risks to their economic outlook in general and their banking sector in particular. The resultant uncertainty is feeding into the broader economy and started to weigh on consumer and business confidence. This morning's weak PMI reading is a reflection of this reality.

The market's optimism about the deal is a vote of confidence of sorts in the nature of the plan currently under discussions between the countries involved, particularly Germany and France. The plan will reportedly provide for bank recapitalizations, further strengthening of the rescue fund, and a major restructuring of Greek debt. The market has long been a looking for a simultaneous tackling of all these inter-related aspects of the problem and appears to be reassured that the leaders are finally coming around to doing that. It is far from clear at this stage if we will have the comprehensive plan on Wednesday. But judging by the market's reaction thus far, it is not particularly disppointed by the delay.

In economic reports this week, we get the first look at the third quarter GDP report on Thursday, Durable Goods on Wednesday, and the Personal Income and Outlays reading on Friday. Recent positive economic readings have helped bring down recessionary fears and the GDP report may bring growth numbers as high as in the 2.5% to 3% range. This would be a significant improvement over how the economy performed in the first half of the year.

On the earnings front, with almost a quarter of the reports already in, we are seeing a fairly reassuring picture. The growth rates and extent of positive surprises are comparable to what we saw in the last quarter. There is still some tentativeness with respect to estimates for next year, but this will likely improve as the reporting cycle matures.  

Of the key earnings reports this morning, we have solid earnings and revenue beat from Caterpillar (CAT - Free Report) . Eaton (ETN - Free Report) came inline with earnings expectations on modestly better than expected revenue, but the company lowered the high end of its earnings guidance. Roper Industries (ROP - Free Report) also came out an earnings and revenue surprise and raised guidance. Lorillard , the cigarette maker, missed expectations.

With some of the more exaggerated fears about the domestic economy easing and the earnings season unfolding in a reassuring enough fashion, all eyes are now on Europe. A prompt conclusion to the current round of discussion and the unveiling of a plan will go some way towards lifting market uncertainties.

Sheraz Mian

Director of Research

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