US corporate earnings remained a key point of contention on Friday, negating a much stronger than expected consumer confidence report. The University of Michigan consumer confidence index spiked to 5-year highs of 83.1 in October, outpacing expectations of a rise to 78.5. Equity markets reflected negativity over forthcoming corporate earnings over the course of the week, with the S&P500 posting a weekly loss of 2.2 percent. Still, it’s worth noting the S&P500 is back at pre-crisis levels, more than doubling its value since the suitably numbered low of ‘666’ seen in early 2009.
Markets also focused on the more negative aspects of third-quarter earnings from Wells Fargo and JP Morgan. Both banking heavyweights recorded a surge in mortgage lending revenue, with mortgage holders taking advantage of lower refinancing rates. The looming ‘fiscal cliff,’ referring to the expiration of the bush-era tax cuts in late 2012, is also taking on greater market relevance in conduction with automatic spending cuts in early 2013. A generally cautious market demeanor kept the greenback’s safe-haven attributes in demand with the dollar index posting a small weekly rise of 0.42 percent, led by a 0.72 percent rise against the Euro.
The Euro’s performance over the week reflected both global growth concerns and conjecture over Spain’s likely request for a bailout. Although the revised IMF forecast and Spanish debt downgrade by S&P was initially met with concern, markets appeared to have found a silver lining, given it may prompt the Spanish government to act on a request for financial aid sooner. This ‘bad new is good’ effect cushioned the Euro with market participants remaining hopeful Spain will take the path of least resistance. A formal request for aid is a key requirement needed to unlock the ECB’s Outright Monetary Transactions, designed to directly influence funding costs. This debt intervention program is most suited to countries such as Spain and Italy who do not require a ‘full macroeconomic adjustment program’ – à la Greece, Ireland and Portugal. Despite the IMF’s overall less-than-inspiring European outlook, markets found some solace in comments from Chief Christine Largarde, who noted more time is needed for Greece to rein in their budget deficit by highlighting the risk of doing too much, too soon. ”It is sometimes better, given the circumstances to have a bit more time,” Lagarde noted in a press conference. “This is what we advocated for Portugal, it’s what we advocated for Spain, and it’s what we’re advocating for Greece, where I have said repeatedly that an additional two years was necessary for the country to actually face the fiscal consolidation program that is considered.” Nevertheless, the statement is at odds with the German stance with German Finance Minister at Friday’s annual IMF conference in Japan, stating, “There’s no alternative to reduce in the medium term too high sovereign debts, especially, and of course for the Eurozone as a whole.”
The highlight of the local week ahead will be the release of the RBA policy meeting minutes on Tuesday. True to form, investors will be scouring through the minutes in an effort to find any indication Stevens and Company will slice another 25bps on Melbourne Cup day. The week ahead will also see a host of Chinese economic feedback, with CPI and third-quarter GDP headlining the docket. Monday’s consumer price data will be of considerable interest as a measure of scope China has to employ further stimulus measures. Headline inflation in September is expected to show 1.9 percent growth in annual terms, down from 2 percent in August. Gross Domestic Product probably declined to 7.4 percent growth in the third quarter, from 7.6 percent in the second-quarter. The latest GDP result, alongside data on Industrial Production, Retail Sales and Fixed Asset Investment will be released on Thursday. China’s export-reliant economy has begun to show signs of life according to the latest trade data from the General Administration of Customs on Saturday. Exports from the region climbed 9.9 percent in September from 2.7 percent in August, while imports return from negative growth to rise 2.4 percent after a 2.6 percent fall in August. China recorded an overall trade surplus of $US27.67 billion in September from a previous $US26.66 billion. Economist’s anticipated a surplus of $US20.54 billion. Greater export growth signals an increase of foreign demand as central Banks from Europe and the US embark on new easing initiatives, while a return to positive import growth is a particularly good sign domestic demand is returning from sub-par levels.