Move over European debt headlines, corporate earnings have something to say.
Even though troubles are brewing again across the pond in
Europe, corporate earnings season in the U.S. is stealing the spotlight. Why? According
to CNBC, more than 100 companies in the S&P 500 have reported earnings and
8 out of 10 have delivered better than expected results – and that’s grabbed
investors’ attention.
Each quarter, publically traded companies update investors on
how their businesses fared over the previous three months. And, according to
the updates we’re seeing, business is still looking okay. The news helped push
the S&P 500 higher by 0.6 percent on the week.
Now, like all statistics, there’s more than one way to interpret
the earnings numbers. While 8 out of 10 companies have beaten expectations, the
“expectation” was pretty low. In fact, earnings increased only 3.7 percent from
the year ago quarter, according to Zacks. For the remaining S&P 500
companies that are set to report, Zacks expects those companies to report
slightly negative earnings growth
compared to the year ago quarter.
Over in Europe, Spain and Italy saw the borrowing rate increase on their government debt, which suggests their debt problem is far from over. And, the International Monetary Fund released a report that stated the obvious – if the European debt crisis can’t be contained, it would negatively impact global economic growth in a severe way.
At the moment, the U.S. markets seem fixated on corporate earnings and have put the European problem on the back burner. But, in this interconnected world, problems overseas may eventually find their way to our shores.
WHEN $1 TRILLION ISN’T
ENOUGH… Earlier this year the European
Central Bank (ECB), Europe’s equivalent of our U.S. Federal Reserve, responded
to the fear surrounding the European debt crisis by offering unlimited three-year
loans with a 1.0 percent interest rate to European banks. According to The Wall Street Journal, at least 800
banks across Europe responded to this offer by borrowing over $1.3 trillion. As
planned, the banks then took a good portion of that money and bought government
securities that paid a higher interest rate. It sounds like a great deal to the
banks – borrow money at a 1.0 percent rate then turn around and buy government
securities that pay a much higher rate and pocket the difference.
The primary objective of this emergency lending was to
indirectly allocate money to European governments who are heavily indebted. The
ECB thought that making cheap money available would help lower interest rates
in these troubled countries and “buy” them more time to work out their economic
problems.
How’s it working?
Initially, interest rates in troubled countries dropped
dramatically as banks bought the high-yielding government securities and fears
of a collapse eased. Unfortunately, The
Wall Street Journal says many of the banks who borrowed money from ECB may
have already exhausted most of those funds – leaving little money left to keep
pushing interest rates down. As a result of this fear, interest rates are
rising again, particularly in Spain and Italy, and, like a leak in a dike, it’s
hard to stop a rise once it gets going.
Will the ECB step in again and help European banks and
governments avoid a Greek-style default? It’s too early to tell, but either
way, we’ll be closely watching this tug-o-war between positive corporate
earnings in the U.S. and negative headlines out of Europe.
Stay tuned…
Weekly Focus – Think About It
“There are no
shortcuts to any place worth going.”
--Beverly
Sills
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