Equity markets appeared to take the result of the Greek elections in their step on Monday, as we thought they might. Despite this there remains a great deal of uncertainty as to the eventual outcome for Greece. On the one hand concessions from the Troika over debt haircuts will leave the door open for other countries within the euro zone to ask for similar concessions. Against that the Greek economy continues to struggle under the burden of debt whilst it remains inside the euro zone. Whilst the will of the Greek people appears to wish for Greece to remain within the euro its politicians should be honour bound to attempt a solution, but the long-term future of Greece within the euro remains uncertain.
We always highlight the importance of the earnings season to stock markets and the risks when earnings fail to meet expectations. US stocks had a bad day, as several blue chips did not quite meet up to analyst's forecasts. After the continued strength of US equities, any disappointment to earnings was going to be hard felt. There were several blue chip companies, Microsoft, Procter and Gamble and Caterpillar that led markets across the world lower. Apple after hours improved the mood by reporting the largest profit figure by any company in history. Equities were also impacted by a weaker than expected durable goods orders for December.
The stronger dollar was quoted by several CEO's for the shortfalls, rather reminiscent of the UK CEO's of about a year ago as they lay the blame of earnings disappointments on the impact of a stronger pound.
We pointed out at the time that eventually these currency effects tend to even them self out over time. The outperformance of US stock markets relative to European ones is at a 50 year divergence. That divergence has began to narrow at the start of this year, and the impact of the move of the US dollar and the euro may see that divergence continue to narrow.
Equity markets tend to adjust very quickly to disappointment on the downside as investors sell first and ask questions later, particularly when valuations are considered stretched. This earnings season looks like it may introduce more volatility into an already shaky investment community, who remain wary of all asset classes. This increased anxiety many have thought has contributed to the recent rise in the gold price.