European Update – Banks to Set the Tone

How Forgiving Will Investors Be?

Earnings season is upon us and investors are adopting a cautious approach as we await the first reports, with a huge cloud of uncertainty hanging over the season.

We know it’s going to be horrific, with a 44% hit to profits expected, but what we don’t know is what this will all mean for the outlook. We’re still operating in extremely choppy waters and the conditions are poor, hardly optimal if you’re expected to provide a reliable outlook for your business.

With most companies opting against it three months ago and a large number likely to again, we’re effectively left to nagivate this crisis in the dark. Investors were willing to accept this last time, the question is whether they’ll be so forgiving this time around. Especially when the reality of the impact on the top and bottom lines hits home.

I’m sure that won’t stop people finding reasons to be bullish. We’ve seen plenty of times before that the bar can be set very low going into earnings season, perhaps that’s what we’re seeing now. The old “bad news is good news” argument may also come out again, with the Fed standing ready to jump in at the first sign of trouble. It could be an interesting few weeks.

The focus this week around the banks will likely be around bad loan provisions once again, as well as their outlooks. We’re still trying to get to grips with the more permanent impact of the pandemic and this is a good starting point and may give us a feel of how the rest of the reporting season will go.

OPEC+ Needs to Tread Carefully

Oil prices are slipping a little as we await the recommendation from the JMMC on Wednesday. The previous cuts have been a roaring success but producers will quickly find themselves in another mess if they don’t get the exit strategy right or repeat the mistakes of earlier this year. I highly doubt the latter but I feel there will be a reduction, it’s just a question of how much. The best outcome for crude prices would just be a simple one month extension of the status quo but that may be a little optimistic. OPEC+ needs to tread carefully.

Onwards and Upwards?

Gold continues to linger around $1,800 with yesterday’s late risk reversal dragging the yellow metal from its highs. The dollar continues to come back into favour during these moments which makes life hard for gold but traders may be encouraged by how well it’s clung on around $1,800. We could have easily seen a quick reversal but it’s hanging on in there. If it finds a way to break last week’s highs then it could be a very bullish moment for gold.

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