Weekly Radar: Managing expectations

January 24, 2013

With a week to go in January, global stock markets are up 3.8 percent – gently nudging higher after the new year burst and with a continued evaporation of volatility gauges toward new 5-year lows. That’s all warranted by a reappraisal of the global economy as well as murmurs about longer-term strategic shifts back to under-owned and cheaper equities. But, as ever, you can never draw a straight line. If we were to get this sort of move every month this year, then total returns for the year on the MCSI global index would be 50 percent – not impossible I guess, but highly unlikely. So, at some stage the market will pause, hestitate or even take a step back. Is now the time just three weeks into the year?

Well lots of the much-feared headwinds have not materialized. The looming US budget ceiling showdown keeps getting put back – it’s now May by the way, even if another mini-cliff of sorts is due in March — but you get can-kicking picture here already. The US earnings season looks fairly benign so far, even given the outsize reaction to Apple after hours on Wednesday. European sovereign funding worries have proven wide of the mark to date too as money floods to Spain and even Portugal again. And Chinese data confirms a decent cyclical rebound there at least from Q3’s trough. All seems like pretty smooth sailing – aside perhaps from the UK’s slightly perplexing decision to add rather than ease uncertainty about its economic future. So what can go wrong? Well there’s still an event calendar to keep an eye on – next month’s Italian elections for example. But even that’s stretching it as a major bogeyman the likely outcome.

In truth, the biggest hurdle is most likely to be the hoary old problem of over-inflated expectations. Just look at the US economic surprise index – it’s tipped into negative territory for the first time since late last summer. Yet incoming US data has not been that bad this year. What the index tells you more about has been the rising expectations. (The converse, incidentally, is true of the euro zone where you could say the gloom’s been overdone.) Yet without the fuel of positive “surprises” we’re depending more on a structural story to buoy equity and that is a multi-year, glacial shift rather than necessarily a 2013 yarn. The start of the earnings season too is also interesting with regard to expectations. With little over 10 percent of the S&P500 reported by last Friday, the numbers showed 58% had beaten the street. That’s not bad at first glance but a good bit lower than the 65% average of the past four quarters. On the other hand, it’s been top-line corporate revenues that have supposedly been terrifying everyone and it’s a different picture there. Of the 10% of firms out to date, 65 percent have reported Q4 revenues ahead of forecasts – far ahead of the 50% average of the past four quarters. Early days, but that’s relatively positive on the underlying economy at least.

And the Apple story is yet another case in point. Even though its shares fell about 10% in after-hours trade on anything from a slight revenue miss, future guidance and market-share concerns — it says more about the scale of expectations built into this one, if spectacular, corporate story. Look at the actual numbers  and you see in absolute terms, its supposedly worrying iPhone shipments were still up 29% over the year to a new record and iPhone sales in greater China more than doubled. A tough crowd to please now, clearly, but again telling us more about expectations that underlying activity. For what it’s worth, Apple’s bottom-line earnings beat the street. 

And finally, the other big – structural rather than cyclical – story in play over the past 10 days has been the unwind of the euro safe-haven plays – hardly surprising given that now two of the three bailout countries (Ireland and Portugal) are back in the private markets again default-free and the one-time big worry (Spain) is drowning in foreign creditors all of a sudden. Bund, Treasury and Gilt yields of course have all been pushing higher, even though QE limits that move. But perhaps the biggest manifestation of the safe-haven exit has been the 3% Swiss franc retreat – who said the SNB couldn’t hold the line? Sterling’s slide too is as much to do with this as it is related to Cameron’s EU sideswipe. Watch out for others too – Nordic markets perhaps? London property? Gold is still higher on the year, but that just underlines the fact it was always more an inflation-hedge rather than haven from systemic shocks.       

Next week turns macro again in west of the Atlantic again – with the FOMC, US December payrolls and US Q4 GDP easily the dominant releases for world markets. European earnings season will keep people on their toes too as the likes of Deutsche Bank reporting amid some renewed jitters about European and German bank restructuring and regulatory pressures.


Europe Q4 earnings Mon: Ryanair

EZ Dec M3 money/credit Mon

Italy Jan consumer confidence Mon

US Q4 earnings Mon: Caterpillar, BioGen, Yahoo

US Dec durable goods orders Mon

US 2-yr note auction Mon

India rate decision Tues

Europe Q4 earnings Tues: AMS, Sandvik

France Jan consumer confidence Tues

US Q4 earnings Tues: Ford, Pfizer, Amazon, Corning  

US Jan consumer confidence Tues

US 5-yr note auction Tues

Europe Q4 earnings Weds: Nordea, Roche, Swedbank

EZ Jan consumer/biz confidence Weds

Italy govt bond auction Weds

German 30-yr bund auction Weds

US Q4 earnings Weds: Boeing, ConocoPhillips, Marathon

US ADP Jan private sector jobs data Weds

US Q4 GDP Weds

FOMC rate decision Weds

US 7-yr note auction Weds

Japan Dec industrial production Thurs

RBNZ rate decision Thurs

Europe Q4 earnings Thurs: Deutsche Bank, Astrazeneca, Shell, BSkyB, Diageo, Ericsson, Infineon, LVMH, Novo Nordisk

German Jan CPI/jobless Thurs

UK Dec mortgage/credit data Thurs

Egypt central bank meeting Thurs

US Q4 earnings Thurs: Dow Chemical, Viacom, UPS, Colgate-Palmolive

US Jan Chicago PMI Thurs

Japan Dec jobless/spending Fri

Europe Q4 earnings Fri: BBVA, BT, Electrolux

Global Jan manufacturing PMIs Fri

EZ Dec jobless, flash Jan CPI Fri

US Q4 earnings Fri: Exxon, Chevron, Aon, Merck

US Jan payrolls Fri

US Jan UMich consumer confidence Fri


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