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Fourth Quarter Earnings Season and Forex

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We previously wrote about the importance of earnings season to the financial markets and how it influences currency moves. Now that earnings season is ramping up for the fourth quarter let’s have a look at what major investors are considering, and what the market might be expecting.

Arguably, fourth quarter earning is the most important season, with the largest number of companies reporting Christmas trading reports, annual reports, and annual outlook. The fourth quarter is largely seen to set the tone for the year, with companies revising or adjusting their initial expectations going forward. This extends to the whole world, with virtually all publicly traded companies reporting during the period.

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At the same time, we have the yearly close of major economic data, and the issuance of annual outlook from major financial institutions, banks, brokers, and analysts.

The Schedule

Fourth quarter earnings season is the longest, lasting from mid-January to the first week of March, and follows a pattern that allows analysts and investors to anticipate key information being released.

Earnings season starts with Christmas trading updates from major retailers, which gives us some insight into how the economy held up during the most critical time for consumer-facing companies.

US major earning comes next, starting with major banks. Over 70% of the Dow components usually report within the third week of January, often setting the tone for the season. They also issue full-year guidance, and their CEOs talk about what their major concerns for the year are. This is enough to set US indices on a new course.

European companies start with trading updates in anticipation of their full earnings releases that occur primarily throughout February. Trading updates typically have a few key metrics that can cause market swings, but generally, it isn’t until the full release that stocks will set out on their new course for the year.

The last week of January and the first of February see a raft of Japanese and Chinese companies reporting, and usually by the second week of February analysts can have a clear picture of how the Asian business sector is performing.

The season then wraps up in early March with the last stragglers and usually small, poor-performing businesses reporting last.

What’s Been Happening So Far

So far, trading has been mixed, without a clear pattern established. Major UK retailers reported disappointing trading sales, with both Tesco and Sainsbury’s missing market expectations, which might be attributable to Brexit. 

The largest US banks had unequal performance, with some beating expectations while others missed them. However a trend was seen of increased ROE showing that banks are actually performing better despite rising rates from the Fed.

The general theme in commentary from Chief Executives of UK firms regarding Brexit has been that they are preparing for scenarios, but have yet to take concrete measures, as they await the result of the negotiations. Although some companies in particular, such as Rover, have made moves in anticipation, so far most companies have remained in a holding pattern despite the looming deadline.

Overnight the largest miner in the world dependent on China said they were continuing as usual and were not expecting negative impacts from their primary export destination.

Expectations

Analysts are going to be looking at some key data that comes out with the releases, and that could have an impact on the market. With concerns over the rising cost of debt, gearing ratios (the amount of money a company owes in relation to sales) will be in focus, especially among US companies. US companies have a record amount of debt, as we mentioned in previous articles, and this could become a concern.

In a similar vein is the concern over gray credit in China, with Chinese corporations also exposed to significant amount of debt, often denominated in dollars. Chinese homebuilders took a turn for the downside yesterday when one of them reportedly had difficulties meeting debt obligations, although this was later resolved. Going forward, maturing debt will likely be a theme in financial markets.

If companies underperform, we’d expect to see a flight to safety supporting the yen, franc, and dollar.  On the other hand, if reports are positive, then we could see an increase in risk appetite.

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