Weekend Agenda: Week Ahead, October 6 – 10, 2014

The quarterly earnings season gets underway next week, with Bank of Japan announcements among the major macro events.

Treasury Secretary Jacob Lew Tours Alcoa's Davenport Works Facility

Rolled aluminum is fed into a machine on the auto treatment line at the Alcoa Inc. Davenport Works aluminum facility in Riverdale, Iowa, U.S., on Tuesday, July 29, 2014. Treasury Secretary Jacob Lew, while speaking to reporters today, said U.S. sanctions are designed to maximize the economic pain on Russia while minimizing the effects elsewhere. Photographer: Daniel Acker/Bloomberg

Daniel Acker/Bloomberg

As earnings season kicks off this coming week, many equity investors will welcome the opportunity to shift their focus away from macroeconomic and geopolitical risks and toward insights on corporate management. And U.S. equity markets are set to get the week off on solid footing, as the S&P 500 and the Dow Jones Industrial Average both rose by more than 1 percent Friday on the back of the strong employment situation report from the U.S. Department of Labor: 248,000 jobs were added to nonfarm payrolls in September. The U.S. unemployment rate dropped to 5.9 percent, the lowest reading since July 2008.

Monday, October 6: Monday will be fairly quiet on the macroeconomic front, with August factory orders in Germany as the biggest release of the day. In the U.S., three- and six-month Treasury bill auctions kick off an active week for government debt offerings.

Tuesday, October 7: Abenomics stands to be Tuesday’s main macro headline, as the Bank of Japan’s interest rate decision and monetary policy statement will grant central bank governor Haruhiko Kuroda the chance to weigh in on the impact of stimulus measures to date. The Reserve Bank of Australia will also make a rate announcement on Tuesday, with most economists predicting no significant change in policy language. August industrial production will be released in Germany, with consensus forecasts for a month-over-month contraction as the European Union’s largest economy is struggling amid a regionwide slump. In the U.K., August industrial production data is expected to be flat versus July. In the U.S., August consumer credit data will be released by the Federal Reserve. Consumer credit levels rose sharply in July, driven by nonrevolving student loan and automotive debt.

Wednesday, October 8: The U.S. Energy Information Administration will issue crude oil stockpile data. Robust supply from North American shale extraction continues to weigh on oil prices. Also on the schedule for Wednesday is the release of the minutes of the September 16-17, Federal Open Market Committee meeting, with any subtle shift in the tone of conversation a likely point of discussion. After U.S. equity markets close on Wednesday, Alcoa will announce third-quarter earnings. The report from the world’s third-largest aluminum producer will be important both as the opening shot of the quarterly earnings season and as a barometer for global industrial demand. Other large-cap equities reporting Wednesday include Costco and Monsanto.

Thursday, October 9: In Japan September machinery orders are forecast to moderate for the month and remain negative on a year-over-year basis contributing to a grim overall outlook for the Japanese economy. In Europe, German trade data for August is expected to register a contraction in exports, as demand form neighbors weakens. In the U.S. initial jobless claims and August wholesale inventories will be released, with no expectations of a significant market impact from either. With the drama surrounding the announced Dollar Tree merger, Family Dollar Stores’ pre-opening announcement will be a focus for equity investors.

Friday, October 10: The Bank of Japan will release the country’s September M2 money supply data, providing an update on the central bank’s aggressive attempts to expand the monetary base. Separately, consumer confidence for September will also be released as political pressure on the administration of Prime Minister Shinzo Abe to delay additional consumption tax increases. In the U.K. August trade data will be released; forecasts show a deficit reduction.

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Portfolio Perspective: Ongoing Euro Weakness: An Underestimated TailwindPieter Taselaar and Thijs Hovers, Lucerne Capital Management

The euro has declined by almost 9 percent since May against the U.S. dollar. Since our fund’s inception, we have consistently hedged out our euro currency exposure and will continue to do so. We feel very strongly, however, that the lower euro will provide a tailwind to European equities via the translation of foreign earnings, improved competitiveness and support to the euro zone’s gross domestic product. Many companies in our portfolio have a significant percentage of their revenues outside the euro zone but benefit from a valuation discount by having their primary stock market listing in Europe. The dollar is near purchasing power parity with a theoretical deutsche mark. A continued euro devaluation would therefore greatly stimulate the German economy. Other countries within core Europe also stand to benefit.

Many of the companies in our portfolio on the long side are high-quality cyclical businesses headquartered in Europe; but with a diverse geographical mix of end-markets. Our analysis demonstrates that current valuations are discounting a zero-growth environment. As we wait for the green shoots of recovery in Europe, these companies continue to generate high free cash flow. This is being returned to shareholders via healthy dividends, and we have recently witnessed an increase in earnings-enhancing M&A activity.

Lucerne Capital Management is a Greenwich, Connecticut–based long-short equity investment firm with a focus on Continental Europe. Portfolio managers Pieter Taselaar and Thijs Hovers have overseen the firm’s flagship Lucerne Capital Fund since its inception in 2002.

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