US corporate reports will set market tenor

The US corporate reporting season now under way should reveal whether recent US equity market gains, which have boosted the local equity market and currency, can be sustained or whether they have, in fact, constituted a false dawn or "suckers' rally".

Recent news reports have been full of commentary lauding the appearance of so-called "green shoots of growth" in the form of economic indicators that are merely flat or marginally positive, rather than catastrophic.

Partly as a result of this, US stock indices have surged since the start of last month.

While its own movement has been far more restrained, the NZX-50 has been following Wall St upwards for the past month topping out at 2635.33 on March 24, a gain of almost 9 per cent on the 5-year low of 2418 it hit just three weeks before.

But some local investors remain unconvinced the recent gains are supported by local fundamentals.

"At the back of my mind I wonder how sustainable that is," said AMP Capital Investors chief investment strategist Jason Wong.

"There's still a lot of headwinds over the next 12 to 18 months. You wouldn't be convinced that the bear market is over, it could easily fall back a bit over the next couple of months.

"It's probably overdue for a bit of a mild correction but anything can happen in this sort of environment."

Rickey Ward of Tindall Asset Management said the local market's gains appeared to be at odds with the commentary from local firms.

"Their recent result releases indicate that times are very difficult and they don't expect any improvement to occur any time soon. Yet, you look at equity markets around the globe and they're pricing in a recovery a lot sooner than expected.

"Maybe we're going to be late coming out of the cycle - I don't know the answer to that but I can only go off what corporates are saying, which is it's rather challenging at best and while we may have seen the worst, we're certainly not out of it. Therefore, share prices really are at the mercy of flows and sentiment, and sentiment is definitely driven off offshore markets."

That sentiment will be determined over the next few weeks by the flow of new information on the health of battered US corporates, particularly the financial sector.

US banks' first-quarter results will likely show that losses from credit cards and commercial and real estate loans have not yet peaked, Reuters reported last week.

The January-to-March period is the first full quarter since the US banking industry got hundreds of billions of dollars of taxpayer bailout money and mergers weeded out several troubled lenders. Results at large US banks, such as Bank of America Corp, JPMorgan Chase & Co, Citigroup Inc, Wells Fargo & Co, were expected to improve from the fourth quarter, helped in part by a surge in mortgage refinancings, lower deposit costs and fewer writedowns.

But the first quarter results, which come in over the next two weeks, may be difficult to read accurately as they will reflect a new accounting rule that may further limit writedowns without actually improving bank balance sheets. Furthermore, the US Government is conducting "stress tests" to see which of the 19 biggest lenders may need more capital.

Westpac market strategist Imre Speizer believed the US market's banking indices had been a reasonably reliable leading indicator for the wider equity market in recent months. In turn, it is the broad equity market indices that are largely driving currency markets at present.

In fact, the New Zealand dollar is even more closely correlated to Wall St than our sharemarket. Between early March and last week, the kiwi surged 20 per cent against the greenback, peaking just shy of US60c, as the positive sentiment around US stocks rekindled appetite for risk among currency investors.

Commenting on the US reporting season, AMP's Wong said investors had already priced in weak earnings so poor results shouldn't move the market too much.

Broadly agreeing, Speizer adds the caveat that while some improvement is expected from the banking sector, if that does not prove to be the case, "you'll see the banks indices sold off, eventually dragging down the broader index, and here we go on the kiwi".

Furthermore, he found it hard to believe all the "dirty laundry" on bank balance sheets was now in the open.

Market rumours hint at further European bank exposures to troubled Baltic economies and also the global shipping industry which have yet to be revalued.