EmailExpected central bank action is providing support to global equity markets.
A quarter hour before the close yesterday, the Wall Street Journal ran an article suggesting the Fed is ready to take action to boost the flagging US economy. In Europe today, a European Central Bank member suggested steps that would increase the bailout capacity of the European Stability Mechanism.
The US stock market rallied late yesterday and the S&P 500 index is indicated to open a touch higher this morning. European stock exchanges, which have fallen significantly lately, are higher today. Even the Spanish exchange, which is down approximately 15% this month, is up 2% today.
There is no hard news to account for the slightly upbeat tone. Apple, as is well known, had a disappointing quarter and the stock is trading down 25 points (4%) pre-market. Caterpillar had a good report, and the stock is getting a solid bounce pre-market after a few months of steady declines. Ford reported profits a penny ahead of expectations, but revenue was below forecasts and down 6.3% from a year ago. PepsiCo was similar: profits beat by a bit but revenue missed and was down 2.2%. WellPoint had a tough quarter. Boeing had a strong quarter.
Overall, the earnings numbers are still troubling in that the revenue trends are disappointing. There are far too many companies coming up short. The stock market typically finds relief during earnings season that profits aren't as bad as feared, and most companies will beat profit estimates. But profit growth is slowing and will be hard to revitalize the second half of the year given the sluggish revenue trends.
Real GDP in the United Kingdom fell 0.7% from the first quarter to the second. In US terms, that is a 2.8% annual rate of decline. That was worse than expected. The only US economic report today is the New Home Sales release at 10:00 ET.
The Fed very well may initiate another round of quantitative easing, or take other actions to boost the economy. The Europeans will almost certainly have to do something to control the growing crises in Spain and Greece. Any such actions might not provide as much support to equites as is currently hoped for by many. The Fed can push harder on the string, but the banking system may not lend. Buying mortgages wouldn't hurt, but the 15-year fixed rate mortgage is already down to 2.87%. Lowering rates further will have limited impact.
The worst thing about considering further Fed action a positive for the stock market is that it is desperately needed.
Founder and Chairman, Briefing.com
