Economy slows and now comes the earnings season

Traders look at electronic boards at the stock exchange in Madrid July 6, 2012.

LONDON (Reuters) - Growing disillusion over the latest steps to resolve Europe's debt crisis and policy easing by major central banks will dominate market sentiment in the coming week, with equity investors also braced for a new company reporting season.

Testimony by European Central Bank President Mario Draghi to Europe's parliament on Monday followed by a meeting of euro zone finance ministers will keep Europe's problems centre stage.

Germany's constitutional court will also hear complaints midweek about the euro area's new permanent bailout fund, which was due to have begun operating on July 1.

But with aluminum giant Alcoa (AA.N) kicking off the Q2 U.S. reporting season on Monday, the focus could quickly switch to the impact of the crisis on corporate performance.

"The Q2 earnings season is not likely to be good," said Manish Singh, head of investment services at Crossbridge Capital.

Overall, second quarter earnings for companies covered by the broad S&P 500 index .SPX are expected to decline by around 1.1 percent compared with the same quarter of 2011, he said.

"If I were already on holiday, I would not hurry back and would extend until the end of the month," Singh said.

Global equity markets have outperformed bonds this year despite evidence of steady outflows from traditional managed funds. The performance gap has widened in the past five weeks.

The MSCI world equity index .MIWD00000PUS is up over five percent since June 1, while the Stoxx Europe 600 index .STOXX gained 4.7 percent in June and was up over two percent in the first week of July.

MSCI's broadest index of Asia-Pacific shares outside Japan .MIAPJ0000PUS logged a rise of about 1.2 percent for the first week of the third quarter and is near a seven-week high.

It's a similar story in major U.S. markets, with a strong June performance so far matched by solid gains this month.

"Bond markets are pricing in a much more dire situation than equities, which could leave equities a bit vulnerable in the short term," said Colin Robertson, Global Head of Asset Allocation at Aon Hewitt.

A big focus in the first week of the new reporting season will be the revelation from mega-bank JPMorgan Chase (JPM.N) of the scale of losses from is disastrous derivatives trades, due to be announced when it reports on July 13.

MONEY, MONEY

Investors will also be digesting the central moves of the past week, when the European Central Bank, the Bank of England and the People's Bank of China eased policy in different ways to fight off the global slowdown.

The Federal Reserve's Open Market Committee (FOMC) doesn't meet until the end of the month, but minutes from its latest meeting are due out on Wednesday.

They should shed more light on the central bank's current view, although Friday's disappointing payrolls report is likely to be more influential.

U.S. non-farm payrolls expanded by just 80,000 jobs in June, falling short of forecasts though they were slightly higher than a revised May reading of 77,000 new jobs.

The Bank of Japan will give its views on the global environment and the health of its own economy when it concludes a two-day meeting on Thursday (July 12th) and publishes its interim forecasts for growth and inflation.

"The decision on whether to provide additional stimulus is likely to be finely balanced," said David Rea, Japan Economist for Capital Economics.

"It has been our call since before June's meeting that the (BoJ) Board would ease in July and after weighing up the evidence, we are sticking to this call for an additional 10 trillion yen ($125 billion) of asset purchases at this meeting."

CHINESE DATA DUMP

The big data release of the week will come on Thursday when China unveils its second quarter economic growth numbers, and June data on industrial production and retail sales. ECONCN

A Reuters poll showed economists expect the data to show China's economy expanded in the second quarter by 7.6 percent from a year earlier, its weakest performance since the 2008-09 financial crisis and the sixth straight quarter of lower growth.

The big worry for Asia's exporting nations, such as China, is a possible slide by the world economy into a repeat of the financial crisis of 2008/2009, when global trade ground to a halt.

But the announcement by the PBOC on July 5 of China's second surprise rate cut in the space of a month will offset much of any negative impact from the data

Investors also get data on German trade performance in May and UK industrial and manufacturing production.

(Reporting by Richard Hubbard; Editing by Jeremy Gaunt)