There is a symbiotic relationship between all financial instruments, with stocks affecting, treasuries, which in turn affect the currency, and that goes back to influencing stocks. So, when there is a major event for the stock market, it’s worth it for forex traders to pay some attention.
Today marks the unofficial start of earnings season, with three major US banks – JPMorgan (NYSE:JPM), Citigroup (NYSE:C), and Wells Fargo (NYSE:WFC) – reporting their third-quarter earnings.
What is earnings season, you ask?
Companies tend to report on a quarterly basis, with the vast majority of them starting their financial year in line with the calendar year. This means that after the end of each quarter, there is a rush of earnings reports over a four- to five-week period, which gives investors insight into how the myriad of companies across the world is performing.
Analysts scrutinize corporate reports for information not just on how the company is performing, but the outlook for how it expects the economy and market to perform in the future, and to determine macro trends by comparing results within economic sectors. Earnings season implies a lot of equity data and increased market volatility, which often spills over into the forex market. This aside from moving the Dow, NASDAQ Composite, Dax and FTSE 100.
OK, so how does it work?
Because the data comes out over an extended period, typically we don’t see a sudden move in the market. But as more and more companies report, traders and analysts can get an idea of whether the economy is doing well, is stumbling, whether there is an as yet undiagnosed financial problem, among other issues, and react accordingly.
For example, if many UK companies report that they are seeing drops in sales, they are missing their guidance targets and expressing concern over Brexit, this could lead investors to short the FTSE 100, driving down UK equities and by extension weakening the pound. Weaker economic performance as exemplified by lower corporate sales implies that inflation would be less of a concern for the BOE, extending the timeline for the next rate hike. This consensus would be reached over time and could lead to a slowly building trend that might last for several months.
Another example might come as a result of a single earnings report from a major company that implies data from the broader market. Walmart (NYSE:WMT) sales, for example, particularly the same-store sales component; a substantial beat above sales guidance and targets would imply the economy is doing better than was previously thought.
What’s on analysts’ minds going into third-quarter earnings season?
Several issues have broader market implications that ought to get attention as we get the procession of reports. Among them are:
– The divergence between US and Europe: Core economic data from the Eurozone was lackluster over the last couple of months, and underperformance in EU businesses might consolidate the growing divide in economic outlook as well as monetary policy between the world’s two largest economies.
– The implication of the US tariffs: Analysts will be scrutinizing reports for CEO commentary of the impacts of US tariffs. In the case of US companies, for potential problems with increasing costs; and in the case of Chinese companies (which typically report around the end of the month), whether the tariffs are having an impact on their bottom line.
– Fed policy: Likely there will be extra attention on loan generation in US banks as the Fed squeezes the money supply. Some analysts are in agreement with President Trump that the Fed is tightening too fast, and that would be reflected in commentary from banks - other analysts disagree, citing the need for monetary policy normalization and the low unemployment figures, with good performance in the financial sector seen supporting this view.
– European periphery back in focus: following the budget dispute between Rome and Brussels, volatility in Turkish lira, tax hike in Spain, there is a lot to keep investors worried about economic performance outside the European core. Good reports from companies exposed – in particular, BBVA (MC:BBVA) in Spain – to the periphery could assuage some of those concerns.
Given the significant slump in US equities the last few of days, traders are going to be quite eager to get some good news from the first companies to report – usually, those are US companies – to help alleviate some for their concerns.