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Ahead of Wall Street - July 9, 2012

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Monday, July 9, 2012

The domestic economic calendar is on the thin side this week, though the second quarter earnings season gets into the spotlight with Alcoa’s (AA - Free Report) release later this afternoon. Early signs indicate that the earnings cycle may have run its course with revenue gains hard to come by in a slowing global economy and margins already topped out.

We will know for sure in the coming days as the earnings season gets into high gear, but the initial reports and pre-announcements seem to indicate that earnings growth may not be available as a reliable prop for the market anymore. The softening earnings picture will likely get added to the market’s existing worry list of Europe, China, and the questionable domestic economic scene.    

With respect to Europe, finance officials are meeting today to hammer out details of the agreement announced in the last Euro-zone summit a few days back. The market is getting nervous on lack of follow-through progress, particularly with respect to the agreement’s banking sector provisions. Moving towards joint banking supervision is the stated Euro-zone goal, but hardly anyone expects the path leading there to be without twists and turns. And the related anxieties have started showing up in the region’s government bond yields, with Spain and Italy’s yields inching back up in the wrong direction.  
Europe is not the sole global issue weighing on the equity markets, the evolving outlook for the Chinese economy is equally if not more significant. The Chinese prime minister’s statement about the economy over the weekend seems to confirm some of the concerns raised by last week’s surprise rate cut by the central bank, the second less than a month. The decline in inflationary pressures, as confirmed by this morning’s inflation reading, indicates that the Chinese central bank could afford to get more aggressive in its easing efforts.

We will know the extent of Chinese slowdown later this week as the second quarter GDP report comes out on Friday. The current consensus expectation of 7.6% growth in the second quarter will be weakest reading since early 2009. It is perhaps not unreasonable to see downside risks to Friday’s growth number in light of last week’s interest rate cut and the weekend comment from the prime minister.

On the home front, the market will be keeping a close eye on the Fed to handicap the odds for further QE following the latest run of  weak economic reports. Minutes of the Fed’s June meeting coming out Wednesday afternoon will be of particular in that respect. The earnings season will get into high gear from next week onwards, but results from Google ) after close on Thursday and J.P. Morgan (JPM - Free Report) and Wells Fargo ((WFC - Free Report) ) Friday morning will give us some flavor of things to come.

Sheraz Mian
Director of Research

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