I’ve been writing for a while now about the reality of poor earnings and revenues ultimately undermining recent elevated valuations in the stock market and last night reality bit hard across Europe and in the US as stock markets, crude, gold and copper all swooned.
Du Pont and 3M were the headline acts in the US posting weaker than expected results missing revenue expectations and downgrading their full year outlook’s. Additionally Du Pont announced 1500 job cuts. Unsurprisingly its shares were smashed and are down more than 8%. It was a similar story in Europe with Swedish Engineer Alfa Laval falling 5.7% after reporting that its orders fell more than expected in Q3.
Du Pont, 3M and Alfa Laval are just 3 examples in a broader global trend that is undeniable. That is, in a world of de-leveraging and austerity demand in aggregate is, or is likely to be, lower and as a result once cost savings and productivity improvements are wrung from individual companies it is on sales and revenues that profitability relies. Companies are simply finding this difficult and no amount of central bank money drops into the coffers of the big global banks is going to help the average US, European or Asian citizen because this is a different sort of global recession or near-recession.
This does not mean that I am outright bearish and looking for a stock crash – I simply don’t have that foresight – but I have been warning of the risks of a Q3 2007 style earnings season since the outset and when I combine this with stock volatility at pre GFC levels all of the warning signs have been flashing red. Then of course you get the S&P 500 breaking important support as you can see in the chart. My target on this is a move on the S&P 500 into the 1370’s for a number of reasons but at a minimum a test of the 200 day moving average.
At the close of play European shares were all sharply lower following earnings, the US and also Moody’s downgrade of a number of Spanish regions. The FTSE fell 1.44%, the DAX dropped 2.11% and the CAC was 2.20% lower. Interestingly the worst performing stock market in Europe was Oslo which fell 2.55%.
In the US stocks closed pretty much on their lows which will pressure trade in Asia today and in the early European trade this afternoon. The S&P 500 dropped 19 points or 1.34% at 1414, the Dow fell 230 points and the NASDAQ dropped 0.88%.
In FX markets, the euro came under pressure from the Spanish downgrades and the stock market swoon with the usual preference of traders for safe havens like the Yen and the US dollar knocking the single currency lower. From a high of 1.3075, the euro fell to a low of 1.2950 before rallying to sit at 1.2978 as I write. The technical set up is below but it seems that if the stock market sell off accelerates then it is fair to expect that the euro’s run has ended and its back toward the range low at 1.28 soon. It might be hard to fathom why poor stocks centered on poor US company earnings and outlook help the dollar but it’s all about liquidity and safety. For all its warts and flaws the US economy, its currency and its bonds remain the asset of last resort for global investors. Equally at times of trouble US investors take their money home which also puts a bid under the US dollar.
In other markets the USDJPY breakout has stalled as the Yen caught a safe haven bid of its own and this pair was very quiet range wise trading only 79.69-99 in the past 24 hours as the competing US and Yen flows essentially cancel each other out. Sterling got smashed along with its European cousin falling from a high of 1.6024 yesterday to a low overnight of 1.5910 before staging a little rally to 1.5948.
For the Australian dollar it wasn’t a great night trading from yesterday’s high of 1.0338 to a low of 1.0230 for a more than 100 point drop but its not exactly breaking wide open. This is extremely problematic from a national economic outlook point of view because in a world of weak global output and outlook the Aussie is supposed to be a shock absorber and it is simply not doing that job – which simply means structurally lower interest rates and another cut by the RBA in November.
On commodities we saw crude break wide open and it has now pushed below the bottom of the recent range and looks headed below $80 possibly now. The front contract lost 2.28% and fell to $86.63 Bbl. Gold lost 0.97% and sits at $1708 oz and it looks biased lower still. Copper likewise is starting to look very wobbly dropping another 1.31% overnight. Corn dropped 0.56%, wheat fell 1.08% and soybeans rose 0.48%.
Lets have a look at some Met4 charts from my AVATrade platform.
EUR/USD: EUR hasn’t broken its recent uptrend. It’s so far just sold off and the hourly and 4 hour charts don’t suggest a EUR crash just yet. First level to watch on the day is 1.2937 which would usher in a further 80/100 point fall but the level has to give way first.
AUD/USD: The daily charts are still pointing lower as are the 1 and 4 hour charts. On the day there may be some consolidation however a move toward 1.0280 might occur on the day.
Data: It is a huge day of data all around the world today. In Australia the CPI is out and we’ll get a feel for whether there are any carbon tax related impediments to the next RBA cut. Offshore we look to Chinese PMI, European IFO and Manufacturing PMI while in the US we get some home data and Markit manufacturing PMI.
Here is how the markets looked this morning.
Twitter: Greg McKenna . He is the Chief Investment Officer of Macro Investor, Australia’s independent investment newsletter covering trades, stocks, property and yield. Click for a free 21 day trial.
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