Inside Insights 19 April 2010

Investment Intelligence|Inside Insights

A weekly, in-depth yet concise report on the most important recent market movements and economic developments.

Added on 19 April 2010 @ 12:28 PM

Corporate results looking good

Markets were dominated by two issues last week: Greece, and US corporate earnings reports. Companies listed in America have to report earnings on a quarterly basis, and this ‘earnings season’ is when analysts compare their forecasts with actual results. Companies that beat earnings forecasts tend to see their stock prices rise. For the market as a whole, of course, earnings season is also an opportunity to judge the overall strength of the US economy. Alcoa was the first major company to report, and its results were disappointing. However, later in the week other large companies reported positive earnings, especially UPS, Bank of America, JPMorgan Chase and Intel. In fact, the latter had its best quarter ever, and what was encouraging was to see revenue and sales growth, not just higher profits due to cost cutting as was the case for many corporates in 2009. This supported equity markets, along with forecast-beating February US retail sales and housing starts numbers. Data also showed continued low US inflation, which will support the Federal Reserve’s stated aim of keeping interest rates low, even as chairman Bernanke commented that a moderate recovery was taking place. Stocks rallied until US regulators dropped a bombshell by announcing that investment bank Goldman Sachs would be charged for fraud for its role in the subprime debacle.

Currency markets, on the other hand, continued to be moved by Greece’s debt saga. After the initial optimism over the joint IMF-EU bailout (with eurozone countries committing around €30 billion in loans over the next year at below-market interest rates if requested by Greek authorities, while the IMF will contribute a further €15 billion), fresh concerns emerged on the implementation of the package. For one thing, it still needs parliamentary approval in several eurozone countries, most notably Germany, where the bailout is very unpopular and an election is looming. Formal consultations with the IMF, requested by the Greek government, will commence this week. This resulted in further euro weakness against the dollar, with the rand following the euro lower towards the end of the week. Finally, China's astonishing economic growth cannot go unmentioned. China’s GDP grew by 11.9% in the first quarter compared to the same quarter last year. This will further fuel the debate over the Chinese policy of keeping its currency undervalued.

Retail sales disappoint

Locally, StatsSA released real retail sales numbers for February. The market expected a modest positive year-on-year number of 0.6% following many months of contracting. However, the actual numbers disappointed with a -1.5% year-on-year reading, unchanged from January’s revised -1.5%. The weak retail numbers show that high unemployment (with close to 900,000 jobs lost last year) and high levels of household indebtedness (the household debt-to-disposable income was 79.8% in Q42009) continue constrain consumer demand for many types of goods. Credit extension also continued to contract in February, the fifth month in a row. The biggest decline in retail sales was in the hardware, paint and glass category, which fell 15.5%, following January’s 16.6% decline. However, demand for durables and semi-durables continued to improve. Sales of household furniture, appliances and equipment rose by 5.1% (from 1.9% in January), while sales of textiles, clothing, footwear and leather goods were up 5.0%, rising rose for the second consecutive month. In other words, there are signs of recover in this important sector, and low interest rates, falling inflation and increased spending during the Fifa World Cup should support positive if unspectacular sales growth over the next three or so months.

Nonetheless, the Reserve Bank’s Monetary Policy Committee will view the numbers as supporting its recent surprise decision to cut the repo rate by 50 basis points to 6.5%. It might even convince them to cut once more when it meets in early May. However, it will also be keeping a close eye on the crude oil price, which has resumed its upward march again. Scarily, a number of commentators are eying a $100per barrel level by the end of the year. As we said last week, while this is a sign of recovering global demand and economic growth, it could also easily choke off that growth.

The Week Ahead

Locally, there will not be much by way of data releases. Wednesday sees the release of building plans for February.

Globally, this week sees US corporate results season continuing, while the market will also be looking for more clarity on the charges brought by the Securities and Exchange Commission against Goldman Sachs. There will also be several other significant data releases in the form of the leading indicators of the US and Japan; the German ZEW confidence survey; PPI data for Germany, the UK and US; industrial production for the 16 eurozone nations; US existing home sales and durable goods production.

As volcanic ash continues to close down European airspace, analysts will start wondering about the economic impact of a prolonged interruption to global air travel at a time when economic recovery is still very fragile. More specifically for South Africa, what will the impact be on the Fifa World Cup if the Eyjafjallajokull volcano continues to spew ash over the next few months?

Fairbairn Capital | Old Mutual

Investment Intelligence|Inside Insights