Janet Yellen stumbles, markets remain calm

Without wishing to tempt fate equity markets appear to be entering calmer waters as investors work their way through the third quarter earnings reports. In common with much of the reporting season, IBM announced weaker than anticipated revenue numbers, but did manage to meet earning expectations. Although IBM’s results were not well received, the miss is being put down to the structural changes IBM is taking on under the new chief executive, and less a reflection of the economy. IBM shares have fallen to a five-year low. Overall, according to reports in Tuesday’s Financial Times, from the small selection of S&P companies that have reported more than half have beaten on earnings. The issue remains in revenue growth, where only a third have beaten at the top line.

Weaker commodity prices should lead to lower input costs for many business and while revenue growth remains tough to find, reduced input costs are probably helping companies meet earnings forecasts.

Another factor that has helped stabilise equity prices in the past week is the suggestion that credit growth is taking place within Europe. According to UBS, bank lending in the Eurozone to corporates has grown for the first time in 38 months. This evidence would suggest that the QE programme announced earlier this year is starting to have some positive impact on the Eurozone economy. On Thursday we have the monthly rate announcement from the ECB with the press conference to follow. There has been some speculation in the press after the latest inflation data that the ECB may announce an extension to the buying programme. At present the ECB are committed to buying bonds into September this year, some economists are now anticipating this date may be extended by another 6 months.

Not for the first time this year Janet Yellen faltered towards the end of an hour-long speech, that led her to require medical attention. The speech itself made little headlines ahead of the Federal Reserve meeting in a week’s time to discuss whether or not to raise interest rates. Janet Yellen continues to stick to the mantra that the first move is data dependent. Speeches from several members of the Committee are suggesting that there is a split developing between those who wish to start the normalisation process, and those who feel the timing is not yet right. It is amazing quite such a fuss continues to be made about what will be a marginal change, if one is made at all.

This growing expectation that the ECB could extend the bond buying program along with the increased speculation that the Federal Reserve will not raise rates into the year-end continues to support our view that central banks are keen to continue to provide a supportive back drop for CEO’s to work in. 

Posted on October 21, 2015 .