Short View: Thank you Q2 2011 corporate results

Bears are confused…despite all the bad news around why Mr US Market is holding steady. US markets have recovered smartly from the lows seen in June 2011.

We are seeing a stalemate in the US debt ceiling issue though since 1940 there has been more than 100 changes in the debt ceiling limits…last time when it was done in early 2010 it was very smooth, most of us would not have even heard of it. Europe debt is getting out of control and there is a near consensus that Greece would default and its rating is just 2 notches above default…did I say default. The term default which was considered so sacred 1 month ago but now the markets are digesting it. There are so many news clips containing possibility of US default and probability of its credit ratings downgrade. Remember US has AAA ratings since 1914 and it has never defaulted on its loan ever. But despite these macro issues Mr Market is holding steady after a smart 5% rally.

Citing weak macro picture, the USD is declining against stronger currencies like JPY and CHF; and Gold is zooming to all time highs.

Bears are confused…finding reason for the steady market.

Since 2nd week of July we have seen a very good set of Q2 2011 corporate results emanating out of the US. Almost 75% of the companies have beaten their estimates. Very few prominent ones have disappointed which include the likes of Goldman Sachs, Caterpillar etc. This is almost 9th consecutive quarters of robust results. Many more are yet to come. We have host of energy companies which are yet to deliver their results which might led the market up for a while.

However things would start looking murkier again post the fading of result season and macro issues would again gain the ground to make bears happy. However there remains a distant possibility of US debt default but I would not undermine the probability of US credit downgrade citing political fight and non-consensus as reasons.

June Monthly Commentary

Global markets are significantly impacted by a broadening of the European sovereign debt crisis and the US debt ceiling impasse. As Italian and Spanish spreads widened, equity markets reflected these concerns as well. Global stocks and currencies are very volatile while gold prices climbed to a new record high, on fears the debt problems in Europe and the United States may spiral into a global crisis.

Stress tests for Eurozone banks released on last fortnight failed to stem the anxiety about a potential Greek sovereign debt default and its contagion effect. In the EBA stress tests, eight banks failed to meet the 5% Core Tier 1 ratio threshold. In the US, as the clock ticks towards the August 2, 2011 deadline for an increase in the statutory $14.3 trillion borrowing limit, investors are nervous about the stalemate in Washington. The lack of progress in negotiating a US fiscal package has already led two ratings agencies to warn of a credit rating downgrade in the event of a US default. However hope remains that the US may avert a default on the optimism that the Congress could reach a debt agreement before the deadline. However US's AAA rating is under a serious threat.

Economic data provide mixed patch for the global economic recovery. June employment data was very bad and way below the consensus however housing markets are seeing some life back. However we remain optimistic that the current soft patch will prove largely temporary and that the world’s largest economy will regain traction in the second half of 2011. Earnings of S&P 500 companies are coming in a very good shape and around 75% of the result so far has beaten the consensus earnings estimate.