Eurozone, Retail Earnings Continue to Deflate - Ahead of Wall Street

By Zacks | Updated August 14, 2014 AAA

Thursday, August 14, 2014

The weak GDP report out of Europe and more soft retail sector earnings reports are today’s major developments. But stocks are indicated to open modestly in the green, likely reflecting easing geopolitical worries.

Today’s Euro-zone GDP data provides further confirmation that the region’s economy is losing momentum, adding to pressure on the European Central Bank (ECB) to get more aggressive in fighting disinflationary pressures. Of the three largest economies in the currency bloc, we knew already that Italy’s economy had contracted in Q2, suspected that growth would be weak in Germany and didn’t expect much from France. The surprising part in today’s report was the weaker-than-expected growth in Germany, with GDP growth falling into negative territory. On the positive side, growth in Spain and the Netherlands came in better than expected, though not enough to offset the big-3 weakness.

Trade was a bigger drag on the German growth numbers, even though Russian sanctions didn’t start having a material impact till towards the end of the quarter. This means that, unlike Japan — whose GDP growth also fell into negative territory in Q2 but is expected to bounce back in the current period — the outlook for the German economy is a lot less certain. The ECB would like to give more time to its June rate cut to flow through to the underlying economy, but this report is guaranteed to add more pressure on it.

At a time when the U.S. Fed and the Bank of England are contemplating switching gears from their crisis-era monetary policies, the ECB will likely be forced to get more aggressive. Today’s modest uptick in Euro-zone stock market indexes in the face of the Q2 GDP data is likely a reflection of this expectation from the ECB.

On the earnings front, this morning’s weak Wal-Mart (WMT) report adds to the soft read we saw from Macy’s (M) on Wednesday. To be fair to both of these leading retailers, their Q2 results weren’t bad – the issue is with their guidance. Wal-Mart blamed higher healthcare expenses and increased investments in its online business for the weak guidance for the year.

Retailers have been struggling for a while and the Q2 earnings season has been no different. Despite the very low expectations, very few retailers have been able come out with a positive surprise. In fact, the retail sector’s Q2 beat ratios are the lowest of all 16 sectors in the S&P 500, and guidance from the likes of Wal-Mart guarantee that the estimate revisions trends will remain in a negative direction as well.

The retail sector has been one of the weakest stock performers in the S&P 500 this year, and the pain isn’t expected to end any time soon.

Sheraz Mian
Director of Research

 
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