Stan Shamu, Research Analyst, IG
FTSE 6804 +12
DAX 9645 +1
CAC 4335 +4
IBEX 10964 +76
MIB 21085 +22
Asian markets are off to a fairly good start to the week, despite some soft leads from US trade. While the economic calendar is relatively quiet today, it seems China has taken on the jump in industrial profits and run with it. There have also been some reports suggesting China is considering opening the capital account to allow access between the Shanghai Composite and Hang Seng in a plan labelled ‘Shanghai-Hong Kong Connect’.
China released its June industrial profits data yesterday and the data showed a 17.9% jump year-on-year, a strong improvement from the previous month’s 8.9% reading. This saw China’s industrial profits year-to-date run rate tick higher to 11.4% and help support the China recovery story. Perhaps this is also consistent with the pick-up in activity we’ve been seeing in China recently. Later in the week we get the July read on manufacturing activity with the HSBC reading and official manufacturing PMI due out. The market is expecting to see a further improvement in the official reading to 51.4 (from 51) and this could see risk bid into the data.
Big earnings week for Japan
It hasn’t been all China, as Japan is also enjoying some gains as we head into the thick of earnings. Japanese equities are in a good position at the moment, as stimulus measures lift earnings and companies have plenty of free cash on their balance sheets. This has been a major talking point in recent months as analysts felt companies are in a good position to conduct buybacks or even return some cash to shareholders.
Nissan Motor and Fujikura kick off earnings season today before earnings start coming in thick and fast through the rest of the week. Other big names reporting this week include the likes of Nomura, Honda, Mitsubishi Electrical and Nippon Steel. The market is expecting to see overall earnings per share growth of around 15%, cash flow growth of 7%, dividend growth of 5% and sales growth of 114%. I assume the anticipated sales growth can be partly attributed to the sales tax hike.
US dollar in focus ahead of the FOMC meeting
Looking ahead to European trade, we are calling the major bourses mildly firmer after a poor performance on Friday. European leaders are reportedly considering further restrictions on Russia’s access to capital markets and this is likely to remain a talking point this week. The euro and pound both remained under pressure against the greenback.
It is shaping up to be a huge week for the US currency with some significant releases on the calendar. The US dollar index closed above 81 for the first time since February and has been trending higher over the past few weeks.
Positioning seems to be skewed to the upside as we head into some key releases for the US this week. The FOMC meeting, GDP data and non-farm payrolls (NFP) will be the key events on the calendar. The Fed is expected to taper by a further $10 billion and the market will be now starting to think about the exit strategy as QE completely winds down. The tone among the Fed members will be interesting as the market looks to establish a median among members’ views as far as the feds funds rate is concerned. Focus will then switch to employment numbers with non-farm payrolls data due out. The market is quite bullish heading into the data, looking for more than 200,000 jobs added. Unemployment claims last week dropped to the lowest level since February 2006 and this saw the four-week average drop to around 300,000. This week’s reading will help determine whether momentum will continue into the second half. We have seen five consecutive months of growth in NFP of over 200,000 including one which was over 300,000. Should we see further strength this week, the USD might be looking to extend gains across the board.
US earnings still rolling out
There will also be more US earnings to look out for with another 150 S&P firms reporting this week. Some of the big names are Berkshire Harthaway, Time Warner, Procter & Gamble and UPS. Last week, global markets were rescued by US earnings, but this might not be the case this week as other factors will be at play in the US. It is also important to remember earnings per share in the US are sitting at record levels with a significant percentage of positive surprises to analysts’ earnings estimates. This puts pressure on earnings to shoot the lights out to prevent investors taking some profits off the table.