In the choice between ‘bad’ and ‘worse’ available to the Greeks in Sunday’s election, they made the ‘right’ call and opted for the ‘bad’ option. This is a big sigh of relief for Europe and the global financial system.
But don’t look for a relief rally today as the market’s attention shifts promptly from Greece to Spain, where yields on government bonds are rising and reaching unsustainable levels, requiring some sort of intervention. As such, the positive aspect of today’s trading action is that we were able to avoid a major or catastrophic negative.
Spanish government bond yields are up above the dangerous 7% level today, which effectively means a very restrictive capital market access for the government. Greece, Ireland, and Portugal needed outside intervention when they reached these levels. Spain’s banking bailout a few days back obviously wasn’t enough and the G-20 summit getting underway in Mexico today has limited room for doing anything good.
A major intervention from the European Central Bank (:ECB) in the form of another round of long-term refinancing operation (:LTRO) will most certainly break the negative momentum in Spanish (and Italian) government bond markets. But the ECB believes that doing more LTRO will relieve the pressure on Euro-zone political leaders to take the tough decisions needed to ‘fix’ the problem, such as moving towards a banking or fiscal union. The question is whether Spain has the ability to sustain these above-7% yields while it waits for Euro-zone leaders to make the right decisions in the summit meeting later this month.
The ECB is not the only central bank in the spotlight this week. The Federal Reserve is in focus as we get the official post-meeting statement from the FOMC on Wednesday followed by Bernanke’s press conference that afternoon. Market participants are looking for the Fed to do ‘something’ on Wednesday.
But what and how effective that ‘something’ will be is up in the air at this stage. They could extend ‘Operation Twist,’ which ends at the end of this month, extend their interest rate ‘guidance,’ or announce a new round of quantitative easing or bond purchases. I don’t think ‘doing nothing’ is one of the options, given how high expectations are some sort of new Fed action. But we will have to wait till Wednesday to find out.
Europe and the Fed aside, we have a number of major housing industry reports coming out this week, including the homebuilder sentiment index this morning, Housing Starts on Tuesday, and Existing Home sales on Thursday. We will also start keeping tabs on second quarter earnings reports this week, with results from companies like FedEx (FDX) and Oracle (ORCL) coming out.
The financial press typically associates the start of the earnings season with Alcoa’s (AA) report each quarter. But in reality, the earnings season gets underway before that, as many companies have fiscal quarters that end at different months than the end of the calendar quarter. For example, Alcoa will release its second quarter 2012 results in July, while a number of major companies whose fiscal quarters end in May will report before that. We will be counting results from all the companies with May quarter ends, like Oracle and FedEx, as part of the second quarter of 2012.
Current expectations are for second quarter 2012 earnings to be up 2.1% from the same period last year, reflecting a modest 0.6% revenue increase and a 13 basis point expansion in margins. This compares to earnings growth of 7.9% in the first quarter, which reflected gains of 4.7% on the top-line and margin expansion of 21 basis points.
Pretty much all of the second quarter earnings growth is coming from the Finance sector. Excluding Finance, total earnings in the second quarter will be down 4% from the same period last year. We will be getting ‘second quarter’ results from 12 companies in the S&P 500 this week.Read the Full Research Report on AA
More From Zacks.com
- Investment & Company Information