The Wrap - Week of July 26th

WrapManager’s Weekly Summary of Top Economic and Market News

United States

US Bankruptcy Judge Steven Roberts ruled Wednesday that Detroit could continue bankruptcy proceedings, allowing city officials to move forward in restructuring some $18 billion of debt, which includes $5.7 billion in unfunded liabilities for healthcare and other retiree benefits and a $3.5 billion pension liability. This marks the largest municipal Chapter 9 filing in US historyⁱ.

Earnings season continues in full force, with notable technology giants Apple and Facebook reporting this week. Both companies exceeded expectations, with Apple reporting earnings of $7.47 per share on revenues of $35.3 billion, while analysts estimated it would make $7.32 per share on $35.02 billionⁱⁱ. Facebook widely exceeded earnings estimates due to better than expected revenue on mobile ads. The company reported earnings of 19 cents per share on revenues of $1.81 billion, which outstripped estimates of 14 cents per share on revenue of $1.62 billionⁱⁱⁱ.

Of the 104 companies that have reported earnings as of July 19, 72% of them have exceeded expectations. So far, this is slightly better than last year’s average of 70%, and in line the four year average of 73%^iv.

Japan

Prime Minister Shinzo Abe’s ruling coalition (known as the Liberal Democratic Party, LDP) scored a major victory Sunday in winning enough seats to secure a majority in the upper house. The LDP now has a majority in both chambers of parliament, giving the party greater control to potentially continue aggressive monetary policies that have characterized Japanese politics this year^v.

Also this week, data was released showing Japanese exports increased for a fourth consecutive month in June, rising 7.4% on year, with exports to the U.S., China and even the EU increasing. The weaker yen that has resulted from Abe’s aggressive monetary policies appears to be having a positive effect here^vi.

Europe

The birth of the Royal Baby, George Alexander Louis, wasn’t the only bright news for Europe this week. The U.K. reported positive GDP growth in Q2, at +0.6% which marked nice acceleration from the +0.3% posted in Q1^vii.

In Spain, the jobless rate fell for the first time in two years, having dropped to 26.3% from 27.2%. It was a welcomed decline, but still a far cry from economic recovery. Some 5.98 million Spaniards still don’t have jobs^viii.

Finally, for the first time in a year and a half, European Purchasing Managers Index (PMI) had a reading over 50, coming in Tuesday at 50.1. Manufacturers reported the largest monthly increase in output since June 2011, and this also marks the fourth consecutive month of increases^ix. A reading over 50 indicates expansion in the manufacturing sector.

China

News from China this week was mixed, as some economic readings were relatively sluggish, but the government also promised fresh efforts to keep growth from slowing too much.

China PMI fell for the 11th straight month, coming in at 47.7 for July. It also marks the 3rd straight month that China’s PMI came in below 50, signaling contraction^x.

On the brighter side, the Chinese government made a statement indicating they intend to keep baseline GDP growth at 7%^xi. China also announced this week that the State Council is targeting 690 billion yuan ($112 billion) of fixed-asset investment in the railway industry this year, while also approving tax breaks for small companies and reduced fees for exporters^viii All signs the government is taking some steps to provide a boost to economic activity and investor confidence.

Have a great weekend,

WrapManager's Investment Policy Committee

Sources:

ⁱⁱⁱ CNBC.com