Tuesday, October 4, 2011
The more things change, the more they stay the same. It appears that the market’s attention is fixed on Greece, to the exclusion of everything else. Europe aside, the market may take notice of Bernanke’s Congressional testimony as well. In other economic data, we have the August Factory Orders report on the docket, but it is unlikely to move the needle much given how the market has been behaving lately.
What we have been seeing in recent days is that Europe-related headlines are trumping positive domestic economic reports. We saw that with Monday’s manufacturing ISM report and that wasn’t the first time this happened. It appears that the market has come around to discounting a relatively benign view of the U.S. growth outlook and is now exlusively focused on Europe.
I believe that uncertainty around the current earnings expectations is of as much, if not more, importance to the market. Consensus expectations are still looking for the earnings growth momentum to continue, but those expectations lack conviction given new questions about growth pace in China and other major emerging markets. The European issue figures in the market’s analytical framework on the earnings front as well.
Europe’s fiscal instability not only poses contagion risks in the worst-case scenario, but it also affects the region’s growth outlook, directly through cuts and indirectly through confidence measures. We will get a better handle on the earnings picture as the third quarter reporting season gets underway in the coming days. But the European situation does not appear to be going away anywhere any time soon.
We may get Bernanke’s take on the European situation in today’s Congressional testimony as well. Some clarity with respect to the extent of the U.S. financial sector’s exposure to Europe will be useful. The Fed chief will also discuss his outlook for the U.S. economy and will most certainly get quizzed on Operation Twist as well.
In corporate news, Apple (AAPL) is expected to announce the fifth generation of iPhone today. The device’s popularity has given the company immense negotiating leverage when deals with wireless carriers. This aspect of the company’s power was amply demonstrated by published reports of its deal with Sprint (S). Apple was reportedly able to extract multi-year volume commitments from Sprint that have an estimated value of $20 billion at current unit prices. No one is big enough for Apple, as the company has similar volume commitments from AT&T (T) and Verizon (VZ). Apple’s iPad franchise is similarly dominant in its category, though last week’s announcement of a competing product from Amazon (AMZN) has the making of a worthy opponent.
The arrival of a shiny gizmo from Apple will likely do little to cheer the market given its Greek fixation. But Bernanke has the potential to make market-moving headlines. We will be keeping a watchful eye.
Sheraz Mian
Director of Research
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