The US market managed to retake a good deal of last week’s losses as investors found confidence in a raft of better than expected quarterly results.
In and of themselves, the results were generally less than inspiring, particularly those from the embattled financial sector – however it was a hint that the worst of the credit crisis was over which emboldened the market.
Take for example JP Morgan Chase, which revealed a 50% decline in earnings for the first quarter and announced a further $2.6 Billion in writedowns. Shares however rallied 6% on the news because the result was better than expected, and because the CEO said that the situation would likely get better towards the end of the year.
The situation was similar for another financial major, Merryl Lynch, which reported the following day. The group notched up its 3rd straight quarter of negative earnings and wiped $6.5 billion off the books due to sub-prime related losses. Again though investors focused on a cautiously optimistic outlook, and pushed shares over 4% higher after hearing the news.
It’s also worth mentioning results from the technology sector – which have on average been better than most other sectors. Analysts have attributed this to the diversified nature of these companies, which have relied on off-shore earnings to help off-set the effect of an ailing domestic economy.
Among the stronger performers, computer giant IBM brought a smile to shareholders faces, after revealing a stronger than forecast 26% jump in quarterly results, and increased their guidance for the full year. Other well known stocks such as Ebay and Google also delivered results that topped most forecasts.
So, all in all a good week for the market. Of course there are still plenty of stocks to report results, but if companies can continue to impress traders, we could well see a consolidation and perhaps even an extension of this week’s gains.
As is usually the case, events in the US proved to be a strong driver of regional markets. Asian markets found support in improved corporate sentiment, while surging commodity prices proved a particularly strong driver of the resource heavy Aussie market.
During the week, supply concerns and continued weakness in the greenback helped push oil to a new record above US$115 / barrel, which allowed stocks such as Woodside to carve out fresh record highs of its own.
Metals prices also did well, with copper and tin also hovering near virgin territory, and that was an important driver for the mining heavyweights.
On the economic front, growth data from China showed that the economic powerhouse is still surging ahead, albeit at a slower pace. The first quarter saw GDP grow at 10.6%, down from the full year rate of 11.9% in 2007. Inflation figures remained high, coming in at a hefty 8%, driven largely by higher food prices.
Europeans also got a read on inflation this week, with Eurozone inflation coming in above expectations at 3.6% - well above the previous month’s figure of 3.3%. The data has ruled out any chance for a rate cut by the ECB, which in turn acted to send the Euro to a fresh record against the ailing greenback. Higher food prices again played a key role, as did higher fuel costs.
The UK market was also heavily influenced by US corporate results, with that result from JP Morgan Chase being a particularly strong driver for Wednesday’s session, with the FTSE climbing above 2% as banks returned to favour. A good part of this was erased on Thursday, following the data from Merryl Lynch, but traders sentiment seems to have improved significantly from where it was a few weeks ago. In fact, the FTSE has rallied over 10% over the past 4 weeks.
Although the outlook over the state of global markets has improved recently, the real question is whether or not we have seen the bottom. That will depend on several factors, not least of which will be company earnings reports. While US economic data continues to paint a fairly bleak picture, if companies can demonstrate an ability to weather the storm that will go a long way to boosting confidence, and in turn share prices. By and large, investors have already priced a lot of negativity into the market, so there seems to be a decent amount of upside potential. As long as we don’t get any more nasty surprises relating to the sub-prime debacle, as long as corporate results come in ahead of expectations, and as long as we don’t see any significant deterioration in the economic situation, we may have reason to think the worst is over. Of course, that’s a lot to bank on right now, and any number of things can happen to change this outlook. One thing that we can count on is that all the uncertainty will continue to produce plenty of volatility – and if you’re a trader, that’s not a bad thing.