Market Insider

Financial Earnings Could Set the Tone, as Markets Watch Europe


Financial company earnings, including Goldman Sachs, could help set the tone for stocks Wednesday.

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There are also several economic reports including producer price inflation data at 8:30 a.m. EST and industrial production, reported at 9:15 a.m.

The earnings season has started off with a mixed bag of results, including a sloppy miss from Citigroup Tuesday.  Some analysts have expected the stock market to start reacting to the slower growth of corporate profits, expected to be in the single digits for the first time since the economic recovery began.

Stocks rose Tuesdayafter Chinese GDP growth was slightly better than expected but weaker than last quarter, fueling speculation the government could move to stimulate growth. Stocks also reacted positively as German investor sentiment improved sharply, and the New York Fed’s Empire state survey showed regional manufacturing activity rising to its best level in nine months.

The euro gained a half percent to 1.266, helped by Spanish bond auctions. Markets now are looking ahead to Portuguese bill auctions Wednesday.

Brown Brothers Harriman currency strategists noted that Portugal could now be dropped from bond indices because the S&P downgrade Friday comes on top of previous downgrades by Moody’s and Fitch. They note that the downgrade could mean Portugal will need more funding.

Brown Brothers strategist Mark McCormick said the market is still very bearish on the euro, and both Greece’s ongoing discussions with the private sector on its debt restructuring and the Portuguese auction will be important events Wednesday.

“The downgrades were priced in. You were starting to see that in the market’s reaction Tuesday,” he said.  Standard and Poor’s cut the AAA ratings of France and Austria, and slashed seven other countries’ ratings, as well as that of the European bailout fund.

“It’s a one-way trade on the euro, but when you have positive events, it allows a little bit of a positioning unwind, and those are the rallies people are selling into right now,” he said.

Earnings Central

Besides Goldman Sachs, earnings are expected from Bank of NY Mellon, Charles Schwab, PNC, State Street, Northern Trust and US Bancorp, ahead of the opening bell. F5 Networks, eBay and Sallie Mae report after Wednesday’s market close.

Earnings to Watch

Barry Knapp, head of equity portfolio strategy at Barclays, said he thought the stock market rally early Wednesday on the Chinese data was a bit surprising. The Dow notched triple digit gains before closing up just 60 points at 12,482. The S&P 500 finished up 4 at 1,293, after breaching the important 1,300 level early in the day.

“They had an early Chinese New Year in January so December numbers were stronger. I guess it lowers the prospect of a hard landing incrementally,” he said.

He also said Europe continues to be a concern. “The European bank deleveraging I don’t believe is complete,” he said, adding banks may have sold their most liquid assets but now face unwinding illiquid assets. Another risk is default by Greece, which may not go smoothly, as some expect, and it may not be priced into the market.

Knapp expects to see the S&P lower in the first half. “We penciled in 1,300 to 1,150… I’m not surprised that the first move out of the gate was positive,” he said.

“The market could start going down during the earnings season. Earnings growth is decelerating,” he said. Knapp said he had thought that the S&P at 1,100 was discounting a 7 percent earnings decline in 2012.

“At 1300, the market is now pricing in a 7 percent increase. Our forecast is for a 6 percent increase. It’s not that the market is unfairly pricing in the earnings outlook. I think it is reasonable at 1300 .The risk reward is a bit negative,” he said.

Natural Gas Prices Chilled By Forecast

Warm winter weather and a record supply level combined to slam natural gas prices Tuesday, sending futures prices on the Nymex to a 10-year low.

Natural gas finished the day at $2.4880 per million BTUs, its lowest settle since March, 2002.

“We’re behind on degree days. It’s been above normal in terms of the temperature, and that has just collided with a record amount of supply being produced and in storage. We’re going to end the season with a record amount of gas in storage, yet again,” said John Kilduff of Again Capital.

EIA natural gas inventory is reported Thursday morning. EIA oil inventories, usually reported Wednesday, will also be reported Thursday because of the shortened holiday week schedule.

What Else to Watch

The National Association of Home Builders sentiment in reported at 10 a.m., and the Treasury releases international capital flow data at 9 a.m.

The financial industry will be paying close attention to the House Financial Services Subcommittee on Capital Markets hearing on the impact of the Volcker rule on markets, at 9:30 a.m. Witnesses include Fed Gov. Daniel Tarullo and Securities and Exchange Commission Chair Mary Schapiro.

Wikipedia and several other internet sites expect to go dark Wednesday in protest of the proposed “Stop Online Piracy Act” and Protect IP Act. The proposals would expand the power of the Justice Department and copyright holders to go after web sites that sell counterfeit goods and violate copyright law. Opponents worry about censorship and object to language that would give the government the right to block entire web sites that have copyright infringing content on them.

Stocks to Watch

Yahoo is likely to be an early mover. Its shares were higher after hours, after announcing that founder Jerry Yang is leaving the company.

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