US Stocks Struggle Despite Earnings

Daily Analysis - 28/04/2015

Equity Benchmarks Retreat After Report Critical of Buybacks Circles Wall Street

Major US stock indices fell after touching new record highs as concerns about the direction of buybacks and rising debt levels among US corporations saw demand for stocks decline. Earnings season has shown the difficulties facing companies as they seek new channels for growth with many struggling to beat expectations in the present challenging economic environment.

US Buybacks and Dividends Set to Surpass $1 Trillion

According to the latest research from Goldman Sachs, American corporations have announced plans to return over a record $1 trillion to shareholders. However, the investment bank was quick to note that this type of exuberance was felt around the time of the last financial crisis and should be treated as a warning sign instead of applauded. It builds on the notion that corporations are quickly adding debt at an increasingly furious pace, heightening the risks as companies deploy nearly one-third of available cash to reward shareholders. Further to this point, in Apple’s earnings announcement yesterday, the company announced plans to boost buybacks from $90 billion to $140 billion, using debt markets to raise additional funds. Debt at the company which during Steve Job’s tenure carried no debt at all, has now seen total outstanding bonds issued at $43.9 billion.

Japanese Outlook Downgraded

Fitch moved yesterday to downgrade Japan’s sovereign credit rating from A+ to A citing the lack of fiscal policy measures to make up for the delayed increase in consumption taxes with the nation’s growing debt-to-GDP ratio expected to level off in the year 2020, steadying at 250%. This is another substantial setback for Abenomics just as the Central Bank tries to restore confidence in its capabilities as the available supply of bonds for the Central Bank to buy starts to dwindle. Although the nation’s borrowing abilities have been in no way hampered, any adverse scenarios for the economy including a more expanded dispute over the Senkaku Islands could see the economy face increased difficulties. Although USDJPY has rebounded modestly from last week’s lows, the pair slumped nearly 50 pips on the announcement as pervasive dollar weakness prevails.

Tsipras Clips Varoufakis’ Wings

Negotiations between Greece and creditors continue to surprise markets after the move by Greek Prime Minister Alexis Tsipras to restructure the Greek negotiating team, taking the limelight away from firebrand Finance Minister Yanis Varoufakis. The move was greeted with optimism as Germany and Euro Area leaders highlighted the eagerness to come to a deal after the announcement of the new arrangement. In a setback for Greek policymakers, local governments have balked at the move to park their excess cash in the Greek Central Bank just as the deadline for paying public workers and pensions nears. The good news is that Greek bond yields retreated slightly on the announcement with the 3-year yield falling almost 300 basis points on the announcement as renewed optimism sent the Euro higher against peers.

GBPUSD Equidistant Channel Technical Pattern

The broad weakness in the US dollar has seen major currencies continue their recent winning streak, especially the UK pound just as GDP is set to arrive later in the session. Although expected to be markedly lower compared to the previous number as slower global growth impacts the near-term outlook, the UK economy continues to experience robust expansion. If the data prints in line with expectations or manages to surpass estimates, the present trend higher is likely to persist. The upward trending equidistant channel in GBPUSD has a predominantly bullish bias with ideal long positions initiated at the lower channel line to be closed at the upper channel line. Any disappointment in today’s data could send the GBPUSD pair sharply lower, with the potential for a breakout from the channel if the slowdown sees a wide underperformance relative to forecasts.