At the very least, earnings season will give traders a partial reprieve from all the Brexit chatter, although it won't likely slow down the moves in currencies and government bonds. The race to par on currencies and negative yields on government bonds presses forward.
Negative yields create a double-edged sword. While rates trend toward zero, investors looking for yield are driven elsewhere. We aren't talking about investors looking for safety, but those who actually need or want income. Corporate bonds or equities become the only alternative. Ironically, the lower rates create a setup where equities need lower and lower returns to still maintain their attractiveness since the risk-free rate of return is a big, fat zero.
In the end, the lower the rates go, the more content investors will be with lower returns on stocks. It feels counter-intuitive since the lower rates across the globe appear to be pushing more and more money into equities, thus driving up prices with the result being higher returns, but that is the likely result over the longer-term. It's one way to explain what we've seen in Japan in terms of both government bonds and equity performance.
Generally, I don't take much away from the first week of earnings season. We will receive lots of bank reports and more Alcoa (AA) jokes than we can handle, but outside of Yum Brands (YUM) , don't expect this week to give us a ton of guidance.
As I mentioned earlier when looking at Action Alerts PLUS holding Facebook (FB) , most short-term charts resembled each other, except for the banking sector. Financials might provide us some clarity on the impact of Brexit, but I still think it's too soon. I believe it will only be worth noting if we see any financials move more than 3% or if we see a 2% initial gap fade and reverse. Otherwise, YUM is the only name I will really look to trade pre or post earnings this week.
There will be much better opportunities after this week in terms of volatility and potential large moves, especially with all the recent large drops, reversals and current price patterns.
Watch the first week of reporting to gather reactions before taking action.