Daily Agenda: Equity Bulls Ignore Downbeat Earnings Season

Disappointing PMI data in China and Europe; group led by Anthony Ressler to buy Atlanta Hawks; U.K. sales numbers weaker than expected.


Andrew Harrer

Google’s quarterly numbers, to be released after equity markets close in New York this afternoon, is perhaps the most widely anticipated technology release this earnings reporting season. Overall, the mood among analysts has been downbeat, as mixed U.S. corporate earnings for the first three months have largely been accompanied by lower guidance from management at many firms, often citing currency volatility.

Disappointments for investors have included a large miss by fast-food giant McDonald’s Corp., weaker-than-forecast revenues from Facebook and dismal performance at DuPont Co. Yet despite all the pessimism, U.S. equities appear poised to capture new all-time highs with the S&P 500 closing yesterday within ten points of a new record. Perhaps many investors are continuing to shrug off diminished expectations in part since the yield on ten-year treasuries, at less than 2 percent, indicates, for the time being anyway, that there’s little income left to be captured in bond markets.

Chinese PMI slips lower. HSBC flash manufacturing purchasing manager’s index levels for China went deeper into contraction territory this month, at 49.2 for April versus a prior 49.6. This is the lowest reading for the index in a year. A modest rebound in export orders was more than offset by declines across all other segments.

Ressler to purchase Atlanta Hawks. A group led by Anthony Ressler, co-founder of private equity firms Apollo Global Management and Ares Management and including Spanx founder Sara Blakely has agreed to acquire the Atlanta Hawks basketball team for $730 million, in addition to assuming debt. If executed, this purchase would be the largest price paid for an NBA franchise since Steve Ballmer’s buyout of the Los Angeles Clippers last year.

Euro zone manufacturing slows. Markit purchasing manager aggregate data for the manufacturing and service sectors released today registered weaker growth in March. Economist consensus forecasts had been for the index to advance from February, buoyed by European Central Bank liquidity measures.

U.K. retail sales disappoint. Retail sales for March released this morning by the Office for National Statistics were weaker than expected, with total sales expanding by 0.5 percent for the month. Sales excluding gasoline rose by 0.2 percent, suggesting that shoppers may not be fully convinced that the U.K.’s economic recovery is sustainable.

Portfolio Perspective: Swiss ConundrumKit Juckes, Société Générale

The Swiss National Bank cracked down on avoidance of negative rates yesterday, tightening the rules so that very few entities are now exempt. This isn’t a great surprise. It does highlight, however, the fact that the move to negative rates isn’t causing an immediate flight of money out of Switzerland that can weaken the currency. March foreign-exchange reserve data show that the total continues to grow, so the failure of the move to negative rates and the revaluation of the currency to turn the tide was already known. What next? The fundamental problem is that Swiss investors’ accumulation of foreign assets is substantially lagging the current account surplus, as has been the case since 2009.

There are several reasons for this risk aversion: low yields elsewhere and the weakness of the Swiss banking sector, which has limited the supply of foreign-currency-denominated assets to Swiss investors, all play a part, but two key points are worth stressing. First, the driver of Swiss balance of payments is not a surge in capital inflows that are going to be scared away by negative rates. Second, Swiss reticence to invest abroad wasn’t because of the super-attractive returns available at home. If it was a structural problem, related for example to the way the Swiss banking industry has retrenched, then it will be hard to tackle because the financial plumbing that recycled the current account surplus pre-2009 has been damaged.

In the end, negative rates — and even more negative ones if necessary — will chase money out of the Swiss franc, but it is clear that this is far harder to achieve than is the case in the euro zone, where the ECB’s move to negative rates has succeeded beyond their wildest dreams. If Swiss National Bank reserve growth is merely an offset, more than just negative rates will be needed. We don’t really know yet how much the economy has been impacted, though economists are downgrading forecasts to look for a mild recession even as the euro zone recovers. We still like short positions on the Swiss franc versus either the Norwegian krone or Swedish krona, but these are long-term, slow-burn trades.

Kit Juckes is a macro strategist for Société Générale in London.