11.07.14 Friday Morning

Bearish spread betters get relief as markets tumble

With many believing a correction in the market was due, those bearish investors have finally had some relief after markets tumbled all week.

More than $1 trillion has been wiped from the value of global stocks since the peak on July 9th. Markets have been drifting lower all week but the big move happened on Thursday, after it emerged a Portugal bank missed debt payments.

The beginning of the week remained relatively quiet following a thin economic calendar providing little catalyst for movements. Investors initially turned to the latest round of corporate earnings with corporations announcing their third quarter results. As always, Alcoa started the earnings season, posting earnings that beat estimates. Alcoa returned to profitability in the second quarter as restructuring charges declined and years of cost cutting finally started to pay off.

Attention turned to the airline sector on Tuesday after Air France-KLM lowered its earnings guidance for 2014. They announced rising competition from other airlines on long-haul flights, weak cargo demand and currency restrictions in Venezuela all hitting earnings. The profit warning sent shares in easyJet and IAG tumbling, down 3.8 percent and 6 percent respectively. UK manufacturing struggled to reach analysts’ expectations on Tuesday, with the data suggesting a contraction of 1.3% in production in June, disappointing expectations for a gain of 0.4%.

The catalyst on Wednesday’s declines was the disappointing inflation data from China, weighing on mining stocks. China Consumer Price Index came in slightly lower than expectations at 2.3% versus the 2.4%. The Hang Seng dropped sharply off the back of the data, falling 1.4%. The Nikkei was also trading in negative territory, down 0.3%. However, early losses were soon recovered heading into the afternoon. European markets closed in positive territory for the first and only time this week.

Wednesday evening saw the release of the FOMC Meeting Minutes which denoted extensive discussions on exit strategies for their bond programme. The Fed indicated it will end its asset purchases in October (a sign of economic strength) and appeared near agreement on a plan to manage interest rates in the future, according to the minutes. U.S. stocks rose to session highs following the release.

Markets were in steep declines on Thursday after early reports a parent company of Banco Espirito Santo delayed payments of short-term notes, resurfacing concerns that banks remain vulnerable. Portugal’s regulator suspended trading of Banco Espirito Santo after its share price crashed 17pc in Lisbon, reviving worries about the underlying health of Europe’s banks. Yields on Portugal’s 10-year debt surged 20 basis points on Thursday to 3.95pc, with contagion spreading to Greek, Spanish and Italian debt.

Despite the banks leading declines, markets did recover slightly Friday morning. The Bank of England held interest rates at their record low at 0.5%, its level since the worst of the financial crisis more than five years ago. The BoE is broadly expected to raise rates either at the end of this year or early 2015.

Next week we will really see the earnings season kicking-off, with the likes of Citigroup, JPMorgan, Intel, Capital One, Google, and IBM reporting earnings. We also have a full economic dairy combined with Portugal’s banking crisis playing on investors’ minds.

Stock of the week
Alcoa returned to profitability in the second quarter as restructuring charges declined and years of cost cutting finally started to pay off. The last three previous quarters has seen the aluminium company suffer losses, largely because of write-downs in the value of production facilities, costs for closing down plants and a legal settlement involving a foreign affiliate. Alcoa is always closely watched as it is the first company to report its quarterly earnings.

Alcoa reported after-tax operating income of $97 million in the latest quarter, compared with a year-earlier loss of $32 million. That improvement largely reflected lower average production costs as the highest-cost aluminium smelters have been closed. Alcoa reported earnings after the close on Tuesday, with shares jumping to close on Wednesday up 5.6% to $15.68.

Next Week’s Data
Monday 14 July
EUR Draghi Speaks

Tuesday 15 July
AUD Monetary Policy Meeting Minutes
JPY BOJ Press Conference
GBP CPI
GBP BOE Gov Carney Speaks 
USD Core Retail Sales
USD Fed Chair Yellen Testifies

Wed16 July
CNY GDP
CNY Industrial Production
GBP Claimant Count Change
GBP Unemployment Rate
USD PPI
USD Fed Chair Yellen Testifies

Thursday 17 July
USD Building Permits
USD Unemployment Claims
USD Philly Fed Manufacturing Index

Fri 18 July
USD Prelim UoM Consumer Sentiment

Next Week’s Earnings
Monday 14 July
Moneysupermarket – trading statement
Citigroup – earnings

Tuesday 15 July
Michael Page – trading statement
ITE Group – interim management statement
Goldman Sachs – earnings
Johnson & Johnson – earnings
JPMorgan Chase – earnings
Intel – earnings
Yahoo – earnings

Wednesday 16 July
ICAP – Interim management statement
Rio Tinto – operations review 
Bank of America – earnings
Blackrock – earnings
eBay – earnings
SanDisk – earnings
YUM! Brands – earnings

Thursday 17 July
Mothercare – trading update
Morgan Stanley – earnings
Capital One – earnings
Google – earnings
IBM – earnings

Friday 18 July
General Electric – earnings 
Honeywell – earnings