Stocks appear on track to start today modestly in the green, potentially reversing some of Wednesday’s losses. But global growth worries that have been weighing on stocks lately are still with us and will remain a drag on market sentiment for some time. The cautious European Central Bank (ECB), which left its policy unchanged today, isn’t helping market sentiment either.
The ECB finds itself in a bind, with the markets expecting it to do what the U.S. Fed did this side of the Atlantic while its German-inspired cautiousness is forcing it to go slow. That said, today’s no-change announcement was no surprise. After all, it would have been way too soon after last month’s rate cut and modest bond-purchase decision to warrant a fresh initiative.
But given the steady deterioration in the Euro-Zone’s inflation picture and growth outlook, the ECB may not have the luxury to wait for long. Wednesday’s weak Germany factory sector numbers and today’s soft wholesale price inflation data are just the latest of long line of economic numbers indicating the slide in the region’s economy.
The September manufacturing ISM in the U.S. also came short of estimates, with a number of forward-looking sub-indexes like new orders and backlog losing ground. But the U.S. situation isn’t comparable to the trend in Germany (or the broader Euro-Zone), as the tone of U.S. data is pointing towards an accelerating growth momentum. It is this divergence of the growth outlook between the U.S. and the Euro-Zone that is showing up in the currency markets as a strengthening dollar against the Euro (and the Japanese Yen). In fact, the weak economic outlook for Europe and uncertainty about the Chinese economy are a major reason for the recent slide in oil prices, with the U.S. oil benchmark now below the $90 a barrel level.
Some people suspect that the seasonal factors and jitters ahead of next month’s mid-term elections are driving the stock market weakness of recent days. While those factors could very well be at play, I think it’s the global growth worries that are the dominant driver at this stage. Lack of support from abroad may not be a big deal for the domestic-centric U.S. economy, but it has nevertheless a bearing on the earnings outlook for the typical S&P 500 member, who earns roughly 40% of its revenues from outside North America.
As with the Ford (F) pre-announcement a few days back, we will likely hear a lot of companies change their tune when describing the business outlook in Europe and other international markets on the Q3 earnings calls that will get going with next week’s Alcoa (AA) release. Earnings are always important to stock prices, but their significance increases even more in the current backdrop of a less supportive Fed going forward.
The Q2 earnings season was pretty strong, but that likely reflected a bounce back from Q1’s weather-induced low levels. This coming earnings season will be the first of 2014 that will be unaffected by one-time events and will give us a true sense of underlying earnings trends.
And as always, we will be right here to give you a front-seat real-time analysis of the reporting cycle.
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