Friday marks the unofficial start of Q3 earnings season, with financial reports from some of the largest banks in the US (and the world). Investors will be particularly interested in this Q3 earnings season, because it will potentially show some of the real world application of interest rates. With currencies bouncing around on the basis of expectations of economic performance, forex traders might benefit from the increased insight into each country’s economic situation that corporate earnings offer.
The main themes of Q3 earnings season are expected to be regionally different. For the US, the focus is likely to be on the impact of expected easing from the Fed. Looser monetary policy typically improves consumer sentiment, and by extension business activity. For Europe, the question is just how bad the economic situation is. On Monday, noted ECB hawk, Joachim Nagel of Germany, came out in favor of easing after noting that his country was likely in recession and would have negative growth this year. For China, traders will be interested in seeing how and if the latest stimulus push impacts companies’ forward guidance, and get a better sense of whether the Asian giant will actually see a rebound in its economy in the coming months.
The Nuances that Affect Currencies
The last three months has offered a series of generally confusing data about the state of the economy. (Well, except in Europe, where it’s pretty much red across the board.) US payroll numbers, for example, crashed in July and August, but rebounded in September. British GDP started off pretty good, but consumer and business sentiment was impacted later in the quarter.
Earnings reports could give some clarity into what direction is dominant. Investors will be looking at corporate real revenue (that is, the change in sales accounting for inflation) to see if consumers are still willing to spend. As central banks move into easing mode, the focus will also be on banks, to see if that is translating into more loans. Increasing credit is seen as helping improve monetary circulation and boosting the economy.
The Main Trends
First to report are major banks, and there the main focus for investors will be around commentary relative to credit risk. Do the banks think that consumers are stressed, more likely to default on loans, and therefore the banks themselves are putting away more funds in the form of provisions? Or, are they breathing a sigh of relief, talking up increasing consumer spending and letting go of their provisions? That is likely a key indicator for economic health, as well as whether or not inflation will come back. High amounts of consumer credit would likely support continued price pressure
The middle of earnings season will likely be dominated by AI-driven tech stocks. This will likely be a gauge of risk appetite among investors, whether they keep piling money into these more speculative investments.
Finally, the tail end of the season has a concentration of consumer-centric businesses, such as grocery stores, retail and restaurants. That might be the clearest indicator of whether people are still feeling the pinch of inflation, or are willing to increase spending and support the economy.
