What’s Critical About This Q2 Earnings Season?
Every quarter, markets are disrupted by a flood of corporate earnings. Normally, the regular financial reports from companies affect primarily equities markets. But earnings season has so many reports concentrated in a short time that the cumulative effects can bleed over into forex markets. Some companies in particular are especially connected to factors that affect how currencies behave.
The next couple of weeks will see an avalanche of companies reporting results for the April to June period, which is why it’s known as “Q2 earnings season” even though we are already in the third quarter. Unofficially, it started last week with major US banks reporting, and will extend to around mid-August. But, by the end of July, more than half of all the S&P 500 and Russell 2000 companies will have reported, as well as most of the FTSE and virtually all the major names out of Japan and China. This mass of financial data will certainly have an impact on markets over the next fortnight or so.
What Matters for Forex
The main theme that markets are likely looking for is the overall health of the economy, which can be broadly measured by how well companies are doing. If the economy is growing, then so do corporate profits. If companies are out cutting jobs, cutting their forecasts, and seeing their profits decline, then it’s a sign the economy is underperforming.
That translates into forex through interest rates. Strong, across-the-board beats in corporate profits would leave the market expecting higher interest rates. By extension, that would support the currency. Disappointing corporate reports would raise the prospect of sooner rate cuts, and weaken the currency. Forex traders could pay attention to the differences in how businesses perform in different economies to see shifts in their respective currencies.
Key Players Among the Masses
Besides the broad trend, there are specific companies that traders often look at for increased insight into how the economy is doing. For example, trade is a key element affecting Forex, since currency exchange is necessary to pay for trade goods. Increasing trade is generally seen as risk-on for forex markets, while slower trade could push traders towards safe havens like the dollar or gold.
Markets then look at the earnings results and outlook from major companies in this area, such as the world’s largest shipping company Maersk. They will have particularly keen insight into global shipping trends and just how much the Red Sea attacks are affecting shipping demand, and logistics prices. Another is FedEx, which is the largest air freight company in the world, which has become particularly relevant as people buy more stuff online. The trends in shipping from FedEx and UPS could suggest whether consumers are willing to spend, or whether rising unemployment rates are leading to a slowdown in buying. By extension, that would mean lower economic growth.
The consensus among analysts is that global corporate income will increase in the second quarter in line with the growing economy. Investors will likely look in aggregate at company guidance to see if that increased growth is expected to persist into the third quarter. That could help color estimates for economic growth, and whether the market will take on a more risk averse attitude or not.