Global Markets Overview – July 21, 2014

Markets maul earnings and defaults

US corporate earnings saw the US market finishing the week in the green and this trend looks to be continuing as several majors saw substantial improvement in the actuals.

Google, Intel, Goldman Sachs and Citi all reported upsides in their respective results, which pushed the US market back into positive territory for the week.

The positive reads were also helped by the high profile takeover of Time Warner, which finished last week up 21% after having rejected FOX's takeover offer for $80 billion. The market believes there is more value to be had here, and on current rumours this appears correct. There are suggestions from the Street that FOX could use funds from the sale of Sky Deutschland and Sky Italia to BSkyB to sweeten the deal for Time Warner. There is no doubt Rupert Murdoch's desire to acquire Time Warner, as he looks to secure bargaining power for pay-TV programming, therefore this trade is likely to continue to drive the media space for the coming weeks; watch for other moves in this space.

However, there is no denying that the global political tensions are going to affect the volatility of trading. The VIX had its largest intraday move in 15 months on Thursday, adding 34% and this is likely to continue to rise as markets look to protection due to the uncertainty. The more pressure that builds on Russia the more volatile European indices will be. With the strong trade links between the continent and Russia, any disruptions to this through sanctions will cause profit taking on European indices.

What is also building as a source of concern for the markets in Europe and China is the threat of corporate defaults. Over the weekend the parent companies of one of Portugal's biggest banks, Banco Espirito Santo, saw it apply for creditor protection. Espirito Santo International (ESI), having missed some payments less than a fortnight ago, released a statement yesterday that it is currently unable to meet its obligations due to the maturity of a significant part of its debt. Banco Espirito Santo needs to defend its position and fast to stop further run-ons and the fear of contagion in the region.

China is also watching the construction sector as a major building firm is rumoured to be struggling to meet its debt obligations. This could become the second default of the year for China. What is more concerning however is the sector; building has been one of the largest drivers of growth in China; signs that this is faulting will allow further talk of a 'hard landing' despite signs of stabilisation.

Ahead of the Australian open

Based on the futures close from Saturday night, Asian markets are likely to start the week in the green, however we are cautious of this call having seen news over the weekend that might weigh on sentiment.

We are currently calling the ASX 200 up 21 points at 5552; this will mean further testing of the very strong resistance level on the ASX. Last week there was a very bearish signal developing at 5540 when a sharp intraday reversal developed on Wednesday. This shows that the bears will defend this level with increasing vigour after having tested this level three times in the last few months; today could be the fourth market test of 5540.

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