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Europe, Earnings Avalanche Will Drive the Market This Week

Sunday, 22 Apr 2012 | 5:04 PM ET

A crush of earnings news in the coming week will compete head on with a new vigilance about the health of the U.S. economy and investor concerns about Europe’s sovereigns.

The F

ederal Reservealso meets this week, and while it is not expected to take action, it will update its economic and interest rate forecasts. Fed Chairman Ben Bernanke also holds his quarterly press briefing.

Wal-mart will be of major interest Monday, as investors react to the shocking weekend report in the New York Times alleging Wal-Mart de Mexico had a widespread practice of bribing officials, as it rushed to build stores and win market share. The story alleges the bribery campaign leads straight to Eduardo Castro-Wright, who was named vice chairman of Wal-Mart in 2008.

The week starts off, however, with a heavy focus on Europe following France’s presidential election Sunday, which resulted in a runoff in May between French President Nicolas Sarkozy and anticipated front runner, socialist candidate Francois Hollande.

There are about 180 S&P 500 companies reporting earnings in the week ahead, but the one that’s got everyone’s eye is Apple. The stock, as of Friday, has corrected 10 percentin 10 days ahead of its Tuesday earnings report. Apple made a rapid run from $400 to $600, raising concern that the stock was running too far, too fast, particularly since it has an oversized influence on the overall stock market.

Other earnings will come from major drug companies, like Merck and Bristol-Myers, and big oil, including ExxonMobil and Royal Dutch Shell, as well as industrials, like Boeing and Caterpillar. Consumer names like Amazon and Starbucks also report, as well as dozens of others.

“The earnings will be there, and the Fed, but I think Europe will still be there to drive the bus,” said Art Cashin, director of floor operations at UBS.

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PMI manufacturing data from China and the euro zone is expected early Monday morning, and that could also start the week with a focus on the global economy, for better or worse. U.S. data includes new-home sales and home-price data Tuesday, weekly claims Thursday and the first look at first-quarter GDP on Friday.

Euro Watch

“I think a stronger showing for Hollande is pretty well priced in. What would be the real surprise would be a stronger showing by Sarkozy which would help the euro,” said David Gilmore of Foreign Exchange Analytics. Hollande favors raising taxes on the rich and does not agree with the fiscal compact agreed by European leaders.

“France is married to Germany and not even a socialist is going to break up that relationship!” said Gilmore.

“I think the focus is really on Spanish bond yields," Gilmore said. "If they push up high enough, it could get people back in the fetal position and we would see risk sell off — equities weaken and the euro sells off.”

Spanish yields touched 6 percent Friday, and were trading just under that level at the end of the day. The concern is that Spain cannot grow its way out of its fiscal crisis, and that its banks are not capitalized well enough if the economy deteriorates further.

The euro, however, finished the week with a gain, up about 1.1 percent against the dollar, at 1.32. It was helped by news that G-20 leaders agreed to inject $430 billioninto the IMF’s fund. The IMFwas holding its spring meeting Friday and over the weekend.

Fed Ahead

Some disappointing U.S. economic reports, particularly home salesand jobless claims, helped make for choppy trading in stocks in the past week, and for gains in the Treasury market.

But analysts do not see the economic data as negative enough to force the Fed’s hand on further easing when it meets Tuesday and Wednesday. The Fed has been signaling the market that it has no plans for now for further quantitative easing .

The Fed has also not disclosed what it will do about “operation twist” which is scheduled to end in June. In its “Twist” program, the Fed purchases longer dated Treasurys at the same time it sells shorter-term securities, in an effort to pressure longer term rates.

Fed officials have said they could do a third round of quantitative easing, QE3, by purchasing mortgage securities if the economy deteriorates. However, they have said recently they have no current plans for QE3, and the hawkish members have said they see no need for it.

“The big thing is there’s a lot of talk about will they hint or will they not. I think if they don’t hint at QE3, we’re not going to have the selloff in Treasurys that we had in March, or on the March (Fed meeting) minutes,” said John Briggs, Treasury strategist with RBS. “I think they’ll show a little more concern in the growth paragraph, and not make hints of QE3.”

J.P. Morgan economist Michael Feroli said, in a note, that he expects Bernanke to be asked about quantitative easing during the briefing. “We expect his answer will be that no tool has been taken off the table, but he will do nothing to convey that QE is an imminent policy easing option at this point,” Feroli wrote.

He expects the Fed’s statement to say the economy is expanding moderately, and it is not likely to change its guidance that interest rates will stay at zero through late 2014. “We don’t think the recent run of data — which has been a little on the soft side — will have much of an impact on their thinking,” he noted. It is also possible the Fed could drop its reference to gasoline prices, given the recent decline in prices.

Whither Stocks

The Dow was higher in the past week, rising 1.4 percent to 13,029. The S&P 500gained 0.6 percent to 1378, holding above a key technical level of 1370. But the Nasdaq was 0.4 percent lower at 3000, dragged down by Apple , for a third week of losses.

The most defensive S&P sectors — utilities and consumer staples — were the week’s best performers, up 2 percent for their biggest gains since December. The worst sector was technology, down 1.5 percent for the week, but still up 17 percent since the start of the year.

Stuart Freeman, chief equity strategist at Wells Fargo Advisors, said Friday that he was raising his year-end target for stocks, upping his S&P forecast to 1400 to 1450, from 1325 to 1375. Freeman’s 2011 forecast was one of the more accurate among strategists last year. He had targeted 1250 to 1300, and the S&P finished the year flat at 1263.

While some traders are comparing the current soft batch of economic reports to last spring, Freeman said he is not that concerned. Unlike last year, he said the fear of a double-dip recession is not there.

“I think we’ll still see some volatility. We’ve still got election noise,” said Freeman. “We’re still going to be hearing about Europe, but we’re feeling a little bit more positive on the economy. For the full year, we’ve increased our GDP number a bit, based on the breadth of information — leading indicators and what we think is going to be continuing slow employment growth but we’re still continuing employment growth domestically.” Freeman said the full-year GDP forecast was raised to 2.5 percent growth from 2.2 percent.

“We’re seeing a continuation of spending on autos, and auto sales to us doesn’t look like it’s just replacement. You have consumers who are feeling more confident — enough to step up to the plate and purchase some large-ticket items,” he said.

Freeman said earnings look good so far this quarter, but it’s still too soon to tell. As of Friday, about 80 percent of the S&P 500 companies reporting beat estimates, which have been being lowered by analysts.

“I do think the Street is in a much better place than it was in a month ago. There were some pretty aggressive expectations out there, despite the fact it looked like [operating] margins hit their peak in the first quarter of last year,” said Freeman.

He said he expects to see six to seven percent earnings growth for the year. Stocks “are sitting here at the same place we were at in early May last year and the earnings are higher than where they were then … and stocks are cheaper,” he said.

Freeman said he is slightly overweight in the industrials and materials sectors, slightly underweight health care and consumer staples. He remains underweight in financials. “We’re underweight tech with the move it’s made and we’re even weight energy, “ he said.

What to Watch

Monday

Earnings: ConocoPhillips, DR Horton, Eaton, Hasbro, Texas Instruments, Netflix, Xerox, SunTrust Banks, Checkpoint Software, Crane, Philips Electronics

Tuesday

Earnings: Apple, Aflac, Baidu, Amgen, Norfolk Southern, AT&T, MMM, United Technologies, CIT Group, Arm Holdings, Baker Hughes, Coach, Hershey, Illinois Tool, AK Steel, Celanese, McGraw-Hill, Parker-Hannifin, Western Union, US Steel, Reynolds American, Air Products, Panera Bread, Juniper Networks, Buffalo Wild Wings

2-day FOMC meeting begins

9:00 a.m. S&P/Case-Shiller home prices (Feb)

10:00 a.m. New home sales (March)

10:00 a.m. Consumer confidence

10:00 a.m. FHFA home prices (Feb)

10:00 a.m. Richmond Fed survey

1:00 p.m. 2-year note auction

Wednesday

Earnings: Boeing, Caterpillar, Corning, Delta Airlines, Glaxo SmithKline, Eli Lilly, Credit Suisse, Harley-Davidson, SAP, Corning, AutoNation, Southern Co, Sprint Nextel, Nasdaq OMX, WellPoint, U.S. Airways, Equity Residential, Akamai, Las Vegas Sands, Range Resources, Williams Cos, Owens Corning, Penske Auto Group, Crown Castle, Citrix Systems

0830 a.m. Durable goods

12:30 p.m. FOMC rates statement

1:00 p.m. 5-year note auction

2:00 p.m. Fed economic forecast

2:15 p.m. Fed Chairman Ben Bernanke press briefing

Thursday

Earnings: Exxon Mobil, Amazon.com, Pepsico, Royal Dutch Shell, Unilever, Starbucks, Zynga, Coinstar, Celgene, CME Group, Borg Warner, Altria, Barclays, Dow Chemical, JetBlue, Kansas City Southern, Time Warner Cable, Pulte Group, Aetna, Raytheon, Kellogg, Lockheed Martin, AstraZeneca, UPS, Colgate-Palmolive, Moody’s, Starwood Hotels, Gilead Sciences, Bristol-Myers Squibb

8:30 a.m. Initial claims

10:00 a.m. Pending home sales

11:00 a.m. Kansas City Fed survey

1:00 p.m. 7-year note auction

Friday

Earnings: Chevron, Merck, Procter and Gamble, Sanofi, International Paper, Weyerhaeuser, Goodyear Tire, Newmont Mining, Newell Rubbermaid, VF Corp, Simon Property, Covidien, Coventry Health Care, DTE Energy

8:30 a.m. Real GDP (Q1 advisory)

8:30 a.m. Employment cost index

9:55 a.m. Consumer sentiment

Earnings to Watch This Week

Follow Patti Domm on Twitter: @pattidommQuestions? Comments? Email us at marketinsider@cnbc.com

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  • Patti Domm

    Patti Domm is CNBC Executive Editor, News, responsible for news coverage of the markets and economy.

  • A CNBC reporter since 1990, Bob Pisani covers Wall Street from the floor of the New York Stock Exchange.

  • Sharon Epperson is CNBC's senior commodities and personal finance correspondent.

  • JeeYeon Park is a writer for CNBC.com. Follow her on Twitter: @JeeYeonParkCNBC

  • Rick Santelli joined CNBC Business News as an on-air editor in 1999, reporting live from the floor of the Chicago Board of Trade.

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