Markets gear up for US earnings season

Markets gave investors a crude awakening in the early trading sessions of 2016, with risky assets markedly off the table. From ongoing worries about weaker economic dynamics from China, and the possible implications this could have not only on emerging markets but also the global economy, additional weakness in the price of oil and geopolitical tensions picking up in the Middle East; all these factors ensured that 2016 was a start to the year many investors are willing to forget. And possibly the above three themes could pretty well shape the rest of the year.

Global equities and risky assets bore most of the brunt, with credit, particularly IG spreads widening too but putting in a relatively remarkable performance given the turbulence. Last week was a harsh reminder, and we have been saying this for quite some time, that markets remain highly fragile, and that the large part of asset managers will be seeking to limit any damages in 2016 by preserving capital as much as possible.

Markets have historically started the years positively as asset managers and investors seek to position themselves by building up positions, but this time things were quite different, and if volatility in equity markets remains prevalent, we would expect weakness to persist.

Economic data in the Eurozone last week relating to inflation remained relatively unchanged whilst PMIs as well as employment data were testament that the single currency region’s economy is improving. In the US, we ended the week with a strong jobs report on Friday (with the previous two months data also being revised upwards) whilst car sales also showed encouraging signs.

Yesterday, the European Sentix Investor Confidence dropped markedly, indicating that despite improving economic conditions, investor’s outlook on the region might not be commensurate with the recent data news flow. On the economic data front, this week is not as laden as last week, with some key industrial production and confidence indicators, both in the US and Eurozone, to be released, whilst in the UK, we await the Bank of England’s rate decision. In China, we’ll be closely monitoring the imports and exports data in particular, especially following the market’s reaction to weak PMIs last week.

What is more important, in my opinion, over the coming weeks, is the sentiment and momentum behind the upcoming US earnings season, which could also be one of the key themes which are expected to shape Q116. From commodities to banks, consumer cyclicals to non-cyclicals, analysts will be closely scrutinising incoming earnings releases. Given the recent tumultuous end to 2015 and start to 2016, forward looking statements by companies regarding the expectations of the prevalent market conditions over the next couple of quarters are expected to dictate market sentiment, and possibly even direction, for the weeks to come.