A Week in the Rearview – week ending 7/9/2010
In the headlines
A look at some of the market movers over the past week:
- BP may face a showdown with oil well partner Anadarko over costs for the Gulf of Mexico disaster
- BP discussed plans to install a new containment system on the gushing well
- Agricultural Bank of China raised $19.2 billion in its initial public offering
- The OECD said unemployment in rich countries may have peaked
- Citigroup plans to sell nearly $1 billion in private equity investments to Lexington Partners
- Ron Tudor and Colony Capital may buy Miramax from Disney
- The International Monetary Fund increased its global growth outlook for 2010
- The EU released criteria for the regions banking stress tests
- Financial reform may face some challenges making its way into law
- Johnson & Johnson is facing slumping pain reliever sales after continued recalls
Commentary
Perhaps the Fourth of July fireworks and backyard BBQs put a little skip back in the step of beaten-down investors because the market shed the blues this past week. Each of the week’s four trading days saw the S&P 500 index finish in the black and by week’s end the index had tacked on 5.4%. A hefty 3.1% jump on Wednesday provided the bulk of the week’s gains, but the back half of the week kept up the momentum. This is an encouraging start for the third quarter and it pares the year’s loss to 3.3%.
Of course while we can speculate about firework-induced enthusiasm, it was economic and earnings news that provided most of the market’s tailwind. European regulators had a lot to do with the renewed optimism as they released some details about the forthcoming banking stress tests for the major eurozone banks.
Financial troubles in Europe have been an overhang on global markets for months now as a thick fog of uncertainty rolled over individual countries like Greece and Spain, as well as the region as a whole. Though the results of the stress tests won’t be released until later this month, the details about the assessment’s approach gave the market hope that some of the European uncertainty may soon be cleared away. Among the parameters that regulators plan to include are a 17% loss on Greek bonds, a 3% loss on Spanish bonds, and the potential for eurozone growth that lags current estimates by three percentage points.
More positive news came from the International Monetary Fund, which boosted its estimate for global economic growth for 2010 from 4.2% to 4.6%. The group said that the U.S. and Canada are leading advanced economies out of recession while strong growth from emerging economies such as China, Brazil, and India are helping to cushion slower growth in Europe. For advanced economies alone, the IMF projected 2010 growth of 2.6% versus a prior estimate of 2.3%. It did, however, cut 2011 estimates for all “Group of Seven” advanced economies except the U.S. The IMF sees the U.S. expanding 3.3% this year and 2.9% next year.
The Organization for Economic Cooperation and Development, meanwhile, gave a more mixed update. Though the OECD suggested that unemployment in rich countries may have already peaked, it warned that unemployment could remain elevated for years to come. The group also cautioned countries to be careful how they implement austerity measures, as misdirected cuts could exacerbate the employment situation.
Finally, the markets found some of their rally-power in investor optimism about the upcoming earnings season. According to current analyst estimates, S&P 500 companies are expected to show a 34% increase in earnings for the second calendar quarter versus the same period last year. Positive earnings news in the coming weeks could help balance out some of the cautionary economic reports that had markets retreating during recent months.
Looking ahead
There will be some notable economic releases next week. On Wednesday, retail sales numbers will be released and are expected to be roughly flat for June after a 0.8% drop in May. The minutes from the most recent Federal Reserve rate-setting meeting will be made available the same day and will provide some color on the Fed’s take on the economy. Later in the week we’ll get initial unemployment claims, the consumer price index, and the University of Michigan’s sentiment report, all of which the market will likely take note of.
However, we can easily sum up the focus of next week in three words: earnings, earnings, earnings. Second quarter earnings season kicks off on Monday and market watchers will no doubt be trying to extrapolate what the rest of the quarter’s earnings reports will look like based on the first week’s results.
Though the earnings calendar will bulk up significantly in the weeks to come, there are a good number of very notable reports from a variety of sectors during this first week. On Monday Alcoa will kick off the season with its after-market report. On Tuesday and Wednesday we’ll see numbers from Intel, Yum! Brands, and Marriott International. And in the back half of the week we’ll hear from AMD, Charles Schwab, Google, JPMorgan Chase, Novartis, Bank of America, Citigroup, General Electric, and Mattel.
While the quarter’s results will be worth eying, the market is likely to react much more dramatically to the commentary coming from management teams about the quarter ahead and the rest of the year.
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