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Daily Agenda: Investors Brace for Quarterly Earnings Season

Alcoa launches earnings season while Daily Mail mulls Yahoo! bid; Cameron faces Parliament on Panama; StanChart selling Asian loans.

Alcoa, the international and New York–headquartered metals giant currently planning to split into two separate companies, will report first-quarter earnings after U.S. equities markets close today. Traditionally, the aluminum producer’s announcement signals the start of earnings season. This reporting cycle comes as the ratio of negative to positive warnings from Standard & Poor’s 500 index components is at its highest level since 2013. The question facing investors now is whether corporate leaders have set the bar low enough to manage expectations and avoid interrupting the rally from February’s lows.

Cameron to Discuss Panama Papers before Parliament.British Prime Minister David Cameron will speak before Parliament today to address concerns raised over his personal finances after the Panama Papers leak of tax documents from a Panamanian law firm revealed he had owned stock in an offshore vehicle. In response to the uproar, Cameron has published six years of tax data and admitted that he badly handled his initial response to inquiries by the media and political opponents when the scandal erupted.

Daily Mail said to mull Yahoo! bid. The Wall Street Journal reported today that sources at the U.K. media stalwart Daily Mail said it was joining two U.S. tech powers, Alphabet, the parent of search giant Google, and wireless provider Verizon Communications in examining the troubled Internet company. Yahoo! has expressed interest in selling its core online business while retaining its Alibaba stake. (Note: Daily Mail and General Trust is the majority owner of Institutional Investor’s parent company, Euromoney Institutional Investor.)

Slowdown in factory activity in Italy raises concerns over peripheral EU economies. Industrial production data for February released today by Italy’s Instituto Nazionale di Statistica revealed a factory output slowdown for the month, with a 0.6 percent decline for the headline index versus an upwardly revised January reading. Following the heels of last week’s downward revision of gross-domestic-product forecasts and an increase in headline unemployment, the data raises fresh concerns that European Central Bank market intervention has not yet had an effect on real economies in the weaker southern European Union states.

Standard Chartered to sell Asian loans. Bloomberg reported today that unnamed sources were saying that Standard Chartered was exploring the sale of more than $4 billion in assets across Asian markets. The assets in question are a loan portfolio with exposures throughout the primary developing Asian economies. The move comes after the London-based, Asian-centric bank announced late last year that it would slim its balance sheet with a reduction of up to $30 billion of risk assets.

Consumer prices remain stable in China. Overnight, China’s National Bureau of Statistics released consumer price data for March with the headline price index rising by 2.3 percent year-over-year, below consensus analyst forecasts. Politically sensitive food prices rose sharply in several key categories. Separately, producer prices contracted by 4.3 percent versus March 2015 marking the 49th consecutive year-over-year decline.

Portfolio Perspective: Have Options Markets Priced in a Rough Bank Earnings Season? — Jim Strugger, MKM Partners

Quarterly financial sector earnings are forecast to decline 15.5 percent, led lower by diversified financials that are expected to show a 23 percent year-over-year drop per Bloomberg. That ranks second at the GICS industry group level behind energy equipment and services where the consensus estimates a 79 percent earnings per share plunge.

Financials are the worst-performing S&P 500 Index (SPX, 2047.23) sector so far this year, down 7.6 percent versus a flat SPX. At the industry-group level, banks (-15.9 percent) and diversified financials (–6.1 percent) rank 24th and 22nd of the 24 industry groups over the same period. Two questions that will be answered this week are whether the sharp decline in earnings estimates for financials fully captures the difficult quarter and if poor performance of financial stocks has priced in these results.

Based on the post-earnings move implied by listed options on the universal banks that report this week — JPMorgan Chase (JPM), Bank of America Merrill Lynch (BAC), Wells Fargo (WFC) and Citigroup (C) — the market doesn’t appear overly concerned. JPM’s implied change of 2.6 percent is only moderately above the 2.2 percent eight-quarter realized average, a setup mirrored in BAC (3 percent vs. 2.5 percent), WFC (2.3 percent vs. 1.4 percent) and C (3.3 percent vs. 3.8 percent).

It is worth pointing out the divide between JPM/WFC and BAC/C. The former two have outperformed the latter by around 10 percentage points this year and also have lower implied earnings volatility. The one-month skew curves also reflects this apparent risk spread.

Jim Strugger is a managing director and derivatives strategist for MKM Partners in Stamford, Connecticut.

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