World sharemarkets banking on better days

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The headline numbers on the profitability of America's biggest banks are fuelling optimism that the US economy is continuing to improve, and providing the catalyst for still higher share prices.

On Friday, JPMorgan Chase said its profit in the final three months of 2010 shot 47 per cent higher, reflecting a freeing up of reserves as well as improvements in five of its six businesses.

The fact that most of the gain came from the shifting of money earlier set aside to cover bad loans didn't distract investors focused on better days ahead. In many ways, it was fortunate that the bank had been so aggressive in preparing for the worst case scenario and that reality has proved less daunting.

This coming week investors will get a better read on the sector as a whole. Goldman Sachs Group, Morgan Stanley, Bank of America, Citigroup and Wells Fargo will report results.

An increasingly positive profit profile at the nation's banks may be all that's needed to maintain Wall Street's winning streak. When US markets closed on Friday, they had advanced for seven straight weeks. The Standard & Poor's 500 Index is at its highest since late August 2008. Markets are closed Monday for the Martin Luther King Jr. holiday.

"Financials could very easily be one of the real darlings of this particular earnings cycle," Burt White, managing director and chief investment officer of LPL Financial in Boston, told Reuters.

A key attraction to bank shares is the prospect of a return of dividends. Most of the banks chopped or stopped paying dividends during the global financial crisis. Ultimately it's the potential to pocket more money that will drive investors into these shares.

But this week won't just be about the banks.

BP is set to move ahead after reaching a billion-dollar share swap agreement with Russia's OAO Rosneft. The swap, Bloomberg says, replaces all of the reserves that BP sold to pay for the Gulf of Mexico spill at less than half price.

In other Corporate news, Apple will release its latest results after the market closes on Tuesday. Analysts Continue to upgrade their price targets for the iPad and iPhone maker and it seems that Apple's top challenge is going to be to match the growth multiples it set when it was a much smaller Company.

"If expectations get too far ahead, there's no way the Company can live up," Gleacher & Co. analyst Brian Marshall told Reuters.

So far though, Apple has proved adept at checking bullish expectations and then smashing them.

Other key earnings out in the days ahead are from Google, eBay and General Electric.

Analysts predict that earnings overall will increase 14 per cent in 2011, according to data compiled by Bloomberg News.

"We're juggling the fundamental economic prospects with the momentum in the equity market," George Feiger, chief executive officer of Contango Capital Advisors Inc, a San Francisco-based wealth management firm, told Bloomberg.

And shares in Europe and elsewhere also seem to be keen to extend recent rallies.

Part of the reason for that is that while the euro-zone's debt situation remains blurred at best, last week's auctions by Portugal and Spain eased some of the intensity of the fear about their finances.

That's one reason why the euro had its best week in more than 18 months last week and why it's expected to advance again this week.

"The floor is in for the euro," Douglas Borthwick, a managing director for trading at Faros Trading LLC, told Reuters. He sees the euro between US$1.33 and US$1.35 this week and a rally to US$1.50 by year end.

Of course not everyone's ready to make that bet just yet. The yields that Portugal and Spain needed to pay to attract buyers were stiff and investors remain sensitive to say the least to contagion chatter.

On the weekend, German Chancellor Angela Merkel went as far to say investors needed to exercise some restraint as there was no simple fix and there was not going to be any rush to expand the European rescue fund.

Clearly, investors can bank on more volatility in the euro zone as well as profits in America.