Market Insider

Wednesday Look Ahead: Earnings Season Off to Bumpy Start

NYSE Trader
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If Alcoa is an indication, the earnings season could be off to a rocky start.

Pepsi is up next when it reports Wednesday morning, and traders are nervously awaiting banking giant J.P. Morgan's results Thursday.

"I really think the corporate picture might even supplant the European story for the short term...For the next couple of weeks, we might see more of a focus by traders on corporate earnings," even in the bond market, said Abdullah Karatash, head of the U.S. fixed income credit trading at Natixis.

Markets have been hanging on every development in Europe's sovereign debt crisis, but now traders are looking to U.S. company forecasts to see how much a weakening Europe and the hit to confidence might affect corporate profits and the U.S. economy.

"The corporate story will give a little more clarity. Up until now, the European story has been somewhat opaque. I think clarity is lacking in the market," he said.

"Frozen by Fear"

Alcoa kicked off the earnings season Tuesday on a weak note that could spook investors. Its stock fell more than 5 percent in late trading, after it reported profits of $0.15 per share, below the $0.22 expected by analysts. Revenues increased to $6.42 billion from $5.28 billion. The company blamed its miss on lower metal prices, seasonal factors, but also softness in Europe.

Alcoa CEO Klaus Kleinfeld, in an interview on CNBC said the "world is frozen by fear and (it is) cooling down growth. It almost feels like we're worrying ourselves into another recession."  He said the fear can be seen in the increase in speculative short selling in Alcoa and other commodities companies' shares.

But he also stressed things are better than they were in the financial crisis and he called Alcoa a "confident company in a very nervous world."

Alcoa affirmed its forecast of a growth rate of 12 percent for global aluminum demand for 2011 and said that it expects demand to double by 2020. Alcoa's earnings report hurt sentiment in Asia, where Tokyo stocks were trading lower early Wednesday morning. U.S. stock futures were also lower in Tuesday evening trading, after stocks traded quietly in Tuesday's session. The Dow finished down 16 at 11,416, and the S&P 500 was up less than a point at 1195.

Europe Concerns

Europe remains a top concern, while markets await Slovakia's approval of the EFSF (European Financial Stability Facility) bailout fund. Slovakia's parliament voted down the EFSF Tuesday, as a group of lawmakers opposed it on the grounds Slovakia should not subsidize wealthier Greece, which is plagued by out-of-control finances. The vote is expected to ultimately succeed as it is supported as most parties in parliament support it.

Slovakia is the last of the 17 euro zone countries required to approve expansion of the EFSF to 440 billion euros. When the failed vote was announced late Tuesday, the euro — trading above 1.36 — held most of its gains.

"It looks like people expect it to pass on the second vote," said Win Thin, senior foreign exchange strategist at Brown Brothers Harriman. "People are pricing in that it will eventually get done."

European Commission President Jose Manuel Barroso Wednesday is expected to propose measures to recapitalize European banks ahead of a meeting of G-20 finance ministers later this week.

Corn Pops

The USDA updates its estimates of the corn and soybean crops Wednesday morning. Corn and other grains saw some big gains Tuesday, with corn up by the maximum $0.40 limit on the day. December corn futures rose 6.6 percent to $6.45 a bushel, the biggest gain in more than a year. Traders credit short covering ahead of the crop report and talk about Chinese buying for the move. CBOT November Soy bean futures also rallied, gaining 5 percent.

What Else to Watch

The Treasury auctions $21 billion in reopened 10-year notes at 1 p.m. and the minutes of the last Fed meeting are released at 2 p.m. ET (not Tuesday as incorrectly reported Monday). When the Fed changed its September meeting from one day to two days, the FOMC release was moved to Wednesday.

Traders are watching the minutes for any clarity on the Fed's view on what it would take to move on a new quantitative easing program. After the September meeting, the Fedannounced its new 'operation twist' program. That program involves the Fed selling $400 billion in shorter duration Treasurys and buying the same amount of longer dated notes and bonds, in an effort to hold rates down. Its last quantitative easing program, dubbed QE2, involved the purchase of $600 billion of Treasury securities, but that program expanded the size of the Fed's balance sheet.

Occupying Wall Street

Even those traders that don't work in the Wall Street area are watching the protesters camped out in the Wall Street area and demonstrating in cities across the country.

"I do think it would be naive to ignore them. If it does grow into a broader movement and it becomes a lasting fixture, not just in New York but in the capitol, people will be watching it and think that politicians may really be under pressure," Karatash said.

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