Buoyant company earnings enliven recession-focused markets

By Sujata Rao

LONDON (Reuters) – Better-than-expected earnings from a raft of U.S. and European companies helped steady global stock markets on Wednesday, cutting through gloom caused by rising interest rates and the threat of an energy crunch due to Russian gas supply cuts.

Ten-year U.S. Treasury bond yields – the reference rate for the global cost of capital – held just off lows touched on Tuesday, while several bond market recession gauges continued to flash warnings that growth in the world’s largest economy is slowing, if not going into reverse.

Bond yields edged up with the U.S. Federal Reserve expected to deliver another big, 75 basis-point (bp) interest rate hike, while healthy second-quarter company earnings also weighed..

Futures for the U.S. S&P 500 and Nasdaq and rose 1% to 1.5%, while a pan-European equity index was up 0.4%.

Wall Street sentiment was lifted by 4%-5% gains on shares in Microsoft and Google parent Alphabet, which forecast strong revenue growth and posted solid search engine ad sales respectively.

In Europe, a range of sectors reported solid earnings, from carmaker Mercedes Benz and luxury goods producer LVMH to energy firm Equinor and foodmaker Danone. Among banks, Deutsche Bank and Italy’s Unicredit posted forecast-beating shares, boosting an index of European bank shares to a one-week high.

“Some great earnings numbers, especially from Big Tech and luxury goods,” said Vincent Manuel, CIO at Indosuez Wealth Management, though he noted the divergence between buoyant earnings and softer macro sentiment.

“The question is how long we will continue to see this divergence?”

Earlier, heavyweight chipmakers helped Japan’s Nikkei close higher, but a warning from the world’s second-biggest chipmaker, SK Hynix, of slowing demand saw other Asian shares fall 0.5%.

There were some warning signs however, with shares in Deutsche Bank and Adidas notably down 4% and 5% respectively after the companies issued cautious outlooks.

Similarly, miner Rio Tinto slid 3.6% after posting a 29% drop in first-half profit, citing weak Chinese demand, higher costs and labour shortages.

Indosuez’s Manuel noted industrials and consumer discretionary firms better reflected the pressures than tech and healthcare firms.

“I would expect earnings guidance to be more cautious from corporates,” he added.

GROWTH AND INFLATION

The growth-inflation trade-off will be on the Fed’s mind when it announces its rate decision at 1800 GMT. While a 75 bps move is priced in, futures still imply a 15% chance of a 100 bps increase – something Fed officials have downplayed.

GRAPHIC: Fed set to hike rate by 75 bps (https://graphics.reuters.com/GLOBAL-MARKETS/THEMES/klpykyjbgpg/chart.png)

Treasury markets are already anticipating that so many sharp near-term hikes will hurt longer-run growth, with 10-year yields holding around 2.8%, some 25 bps below their two-year equivalent – the so-called curve inversion that often presages recessions. [US/]

“(Company earnings) are helping equities but bonds are pricing in more economic weakness than equity markets,” Nordea chief analyst Jan von Gerich said.

Uncertainty remains on the future Fed path, he noted, adding however that “what they are seeing on the activity side takes a bit of pressure off to do more.”

Europe’s situation is particularly fragile, with gas flows from Russia’s Nord Stream 1 pipeline expected to halve on Wednesday from already reduced levels. That’s sent energy prices zooming up, with German year-ahead prices at record highs.

Germany’s GfK institute said its consumer sentiment index, based on a survey of around 2,000 Germans, dropped to a record low of minus 30.6 points heading into August.

A complete cut-off of Russian gas to Europe by year-end and a further 30% drop in oil exports may lead to virtually zero European and U.S. growth next year, the IMF warned.

Those worries saw the euro post its biggest one-day loss in a fortnight, though it recouped 0.5% versus the dollar on Wednesday.

Another source of concern is Italy, after S&P Global cut its outlook on Italy’s credit rating, sending 10-year bond yields 10 bps higher and its risk premium versus Germany to the highest in over a month.

GRAPHIC: Italy (https://fingfx.thomsonreuters.com/gfx/mkt/klpykyydwpg/Pasted%20image%201658917946895.png)

(Reporting by Sujata Rao and Tom Westbrook; Additional reporting by Dhara Ranasinghe; Editing by Mark Potter and David Holmes)