Global Markets Weekahead: debt and earnings at the crossroads

The coming week is likely to be crucial for the direction of financial markets until year-end, with eurozone stability at stake as well as the latest test of the one bright spot for investors, corporate earnings. In the case of the eurozone, there is talk of a "binary" moment next weekend in which a European leaders summit either comes up with the goods to assuage concerns about the debt crisis or disappoints again.
The former might well be taken as a reason for a sustained rally in riskier assets such as equities. The latter would almost certainly spark a sell off.
A comprehensive plan for solving the eurozone debt crisis at the summit in Brussels - with endorsement at a G20 leaders meeting in Cannes to follow - has been flagged by Germany and France, raising expectations on markets.
Some idea of what is at stake for investors can be seen in their actions over the past few weeks. World stocks as measured by MSCI are up more than 12 percent since hitting a low on October 4. At the same time, yields of both long term US bonds and core eurozone debt have risen well off their lows.
Part of this is in response to expectations of a eurozone debt roadmap. But it also reflects extremely bearish positioning throughout the northern hemisphere's summer months.
In effect, investors hold cash so that they can put it to work quickly if the investment climate changes - which may be happening. In the meantime, given all the volatility and the severity of both the eurozone debt crisis and the slowdown in the US and possibly Chinese economies, the MSCI index is only down 10 percent for the year.
An end-of-year rally could yet put 2011 equity holders into the black. For this to happen, though, the corporate earnings reporting season, getting under way properly on Wall Street in the coming week, will have to meet or better expectations. Corporate performance over the past few years has been surprisingly robust given global economic travails, mainly because unlike governments companies took action early to get their finances in order.
The big test in the coming weeks will be whether the relatively robust performance continued in the third quarter or whether it came under pressure from the slump in US activity.
An early indication was not positive. Alcoa Inc , the biggest US aluminium producer, posted lower-than-expected quarterly earnings and warned of weak economic conditions, particularly in Europe.