Global Markets Overview – 2/17/14

Earnings seasons hit full swing

With limited major macro news this week and after having seen the US and Australia releasing most of their respective January data in the past two weeks, the Asian and European earnings seasons will be the main driver of trade.

Japan, Singapore and Europe are currently in the middle of their respective reporting seasons, with the most interesting of the lot being Japan.

Having seen the Nikkei up 52% in 2013, earnings season has finally given some micro insight as to how Abemonics is tracking; whether major Japanese companies are seeing a pickup in domestic and international demand for its products; and whether Japanese sentiment has been increasing.

The Japanese need to see some form of tangible translation from macro stimulus measures into company earnings and economic development. So far it has been mixed, with Sony and Sharp still struggling; Sony particularly as its computer division sees more change as it announced the removal of the Vaio brand, and demand for core product has come under immense competition.

Japanese carmakers have seen some improvement, however line recalls and soft demand on the domestic front is a little frustrating considering the range of measures from the BoJ and the central government to increase spending and therefore demand for products.

Moving back to the Australian reporting season, and so far the results have been mildly positive. There is certainly a pattern emerging, with players from the mining service space going through a massive translation period. With UGL on the wires this morning it will be interesting to see how one of the larger players in the space is performing.

It will also be interesting to listen to the conference call considering the accusation by a former senior executive that the company's property service division is 'cooking the books'. Having seen a sharp reversal in the group's EBIT breakdown with DTZ (the property division) jumping to 45% of total EBIT from 33% the year before, the engineering division fell away as discretionary spend from mining declines. If this is the case the results today may continue the trend that the pressure in the space is getting too great.

The banking sector has also been positive having seen CBA produce a typical CBA result. Although the share price response to the H1FY14 numbers was muted as calls of 'overvalued', 'low capital growth' and 'lower margins' poked holes in the result, it was another sign that Australia's largest bank (seventh in the world on market capitalisation) is continuing its current course of a well-diversified portfolio with excellent management and the ability to satisfy all stakeholders.

Today it is the turn of the regional banks, with Bendigo and Adelaide bank releasing its first-half numbers. Expectations are for a cash profit of $185 million - an increase of 12% on the pcp with an interim dividend of 31 cents. What will be closely monitored is the net interest margins after having seen CBA's down three basis points and ANZ hinting at lower margins in its Q2 update.

BEN currently has a margin rate of 1.89%; a flat to positive read will be seen as a constructive development, however if it has contracted it will have questions thrown at it as to how the funding to lending ratios are sustainable as its competition for lending.

Ahead of the Australian open

Currently we are calling the market up 32 points on the 10am bell (AEDT) to 5383, even as CBA turns ex-dividend, which is expected to take 11 points out of the index. With BHP, FMG, WES, STO and WPL all reporting this week, and having seen better-than-expected numbers from the likes of RIO, the cyclical plays are the ones to watch this week.

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