Equity markets started Monday on a weak footing as tensions rose in the Ukraine once again, but stabilised as the day went on. Helped by better than expected Citi results, possibly allaying fears after JP Morgan results on Friday that suggested the banking sector earnings will be generally disappointing. As much as the weak trading volumes will have hurt earnings, the pick up in corporate activity may have help offset that weakness.
Once again over the weekend Mario Draghi hoped his words alone would have the desired effect. In comments to journalists the Chairman of the ECB pointed to euro strength being one of the main reasons for the disinflationary trend in the euro area, and raised the possibility of further monetary policy accommodation. In layman’s terms increasing speculation of a possible rate cut at the next ECB monthly meeting. The euro fell slightly against the dollar on Monday, but it rather looks this time that to put real pressure on the currency, actions might be needed more than words.
As investors look for guidance from the upcoming earnings season, JP Morgan on Monday commented that the International Brokers Estimates System (IBES) are projecting an outright quarter-on-quarter fall in Q1 S&P 500 earnings per share. JP Morgan goes on to point out that it would be the first quarter-on-quarter Q1 fall in 13 years. JP Morgan believes this is too bearish; pointing out that in each of the past eight quarters, the final number was better than the initial projection.
So far only about 10% of the companies in the S&P 500 have reported, at this point the year-on-year earnings per share growth is at 5.3%. If that were to be maintained earnings would come in above earlier bottom-up analyst expectations. As we pointed out at the start of the year, analysts usually begin the year overly optimistic about company earnings and these estimates get downgraded in the first part of the year. JP Morgan point out that earnings per share growth projections for Europe have already fallen from 13% at the start of the year to currently stand at 9.2%, and in the US from 9.7% to 8.2%.
Over the past year equities have seen signs of the “great rotation” that many market commentators talked about, as one can see from the chart attached. European equities have seen 38 weeks of inflows. For the first time since the middle of last year, emerging markets saw capital inflows last week. After the rally we saw in the bond market last week, it was not surprising to see that bond funds saw inflows in the last 7 days.