Tuesday, August 12, 2014
The soft investor confidence survey out of Germany is the only notable economic report on an otherwise low-news summer trading session today. Perceptions of easing tensions over Ukraine are keeping sentiment in positive territory and offsetting the German news this morning, but nothing concrete has taken place on the ground to justify the sanguine mood.
We saw more evidence today how the geopolitical tensions over Ukraine are starting to weigh on Germany’s economy. The country’s investor confidence survey, called the ZEW Index, came in much weaker than expected, with the index level falling to its lowest level late 2012.
Many now suspect that second-quarter GDP growth numbers coming out on Thursday will show the largest Euro-zone economy slipping into negative territory, even though the currency union is expected to eke out a modest gain for the period. Uncertainty as a result of the Ukraine situation is undoubtedly at play in the ZEW drop-off, but part of the Q2 GDP weakness is payback for the Q1 strength that benefited from unseasonably good weather (the opposite to what transpired in the U.S.).
On the data docket, the Q2 earnings season is almost over, with results from 91% of the S&P 500 members already. The Retail sector is the only one with any sizable number of Q2 reports still awaited, with a host of major industry players like Macy’s (M), Wal-Mart (WMT) and Nordstrom (JWN) reporting results the rest of this week. Retail has been the weakest sector in the S&P 500 index in terms of earnings surprises thus far in the Q2 reporting cycle, with barely of the third of the companies beating estimates.
On the retail growth front, the problem area seems to be margins, with the overly promotional environment coming in the way of the sector’s earnings performance. Total earnings for the 22 S&P 500 retailers that have reported results (out of 43 total in the index) are up +6.6% on +8.9% higher revenues. Retail sector stock prices have been reflecting this sub-par earnings backdrop as well, with the sector one of the weakest in the S&P 500 index year to date. The roughly half of the sector’s Q2 results that we have seen already don’t raise much confidence in what to expect from the still-to-come reports.
Sheraz Mian
Director of Research
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