So far, not so bad. Early indications are that fourth-quarter corporate earnings aren’t anywhere near as bad as first thought – although Europe is looking less healthy. According to Charles Stanley’s Earnings Tracker earnings surprises from the likes of Apple and General Electric, “may go some way in allaying markets’ concerns about rising borrowing and labour costs and signs of economic slowdown in overseas markets. In fact, this quarter has seen the most positive stock price reaction to earnings beats on the S&P500 since Q1 2016. “

So far, 60% of S&P 500 companies have reported Q4 18 results. The blended (combines actual results of companies that have reported and estimates for those that have yet to report) earnings growth is 16.2% and the actual earnings growth based on only reported results so far is 18%. On the sales front, S&P 500 companies have delivered sales growth of 9% with all sectors except Staples delivering positive growth. Of the S&P 500 companies that have reported, 74% have beaten earnings estimates, “which is above the long-term average of 64% but below the average over the past four quarters of 78%” according to Charles Stanley. Reported earnings are 5% above estimates, which is above the long-term average surprise factor but below the 5.7% average recorded over the past four quarters.

Now for the less positive news. First off, over the month of January, “analysts lowered their earnings estimates for companies on the S&P500 for Q1 19 earnings with US companies now projected to report year-over-year growth in earnings of 0.3% with the largest declines in earnings expected to come from Materials, Energy and Tech stocks. This compares to the 5.3% growth expected by the S&P 500 stocks on 1 January. Over in Europe, the message is even bleaker, even though we are slightly earlier in the reporting season, with only 22% or 132 of Stoxx 600 companies have reported Q4 earnings. As of today, the European benchmark index is posting earnings growth of 2% dragged lower by Tech, Financials, and Materials which are the only sectors posting negative growth. The Stoxx 600 is forecast to deliver Q4 earnings growth of 2.3%. Of those that have reported, 53% of Stoxx 600 companies have reported earnings above estimates which is below the long term average of 50% while 54% have beaten sales estimates delivering sales growth of 13%. All sectors have delivered positive sales growth except for the Communication Services sector. One other European headline number: as of this week, only 21% or 66 Eurozone companies on the Euro Stoxx have reported Q4 results posting 1% earnings growth on the same period last year and sales growth of 4%.

And the UK? Only 6% of FTSE 100 companies have reported Q4 earnings which are up 22% with all sectors that have reported so far posting double-digit growth in earnings. With Brexit still clouding the view, my guess is that most investors will now focus on developments in Germany, where GDP numbers for the fourth quarter are due to be published later this week – at which point we’ll know if Germany has sunk into a technical recession i.e. two consecutive quarters in the red.

I’m slightly more relaxed about the German economy than most – my hunch is that we’re seeing a bunch of shorter-term factors in play. But as a note from DWS reminds us, the markets are signaling a major problem: falling yields on German government bonds.

“The falling yields on German government bonds are giving pause for thought. This applies both to the nominal yields on German government bonds and to the yields on inflation-indexed longer-dated German government bonds, as our Chart of the Week shows. The difference between real and nominal yields, the so-called inflation break-even rate and an indicator of inflation expectations, has also fallen – in the ten-year maturity range even to a new two-year low. All of these are hardly signs of economic dynamism. Since January of this year, the European Central Bank (ECB) has also stopped net new purchases of securities as part of its purchasing program. That should actually have pushed yields upwards.”

The chart below spells out this worrying turn of events.

My guess is that the ECB will be watching these numbers with caution – with a reversal of quantitative tightening or QT on the cards within the next few months.