Anyone hoping that US earnings would provide the catalyst for the next leg up in equities is clearly not getting their way right now, with a fairly limp and disappointing start to the earnings season.
US data (released overnight) had enough in it for both the bulls and the bears, although the fact that the 10-year treasury found buyers suggests the data did not overly impress. Certainly the Philly Fed survey showed a strong headline print, but a number of analysts have seen through the headline and looked at the new orders sub-component and suggested, if looked at in conjunction with the recent New York manufacturing survey, that we could see the country-wide ISM manufacturing print grow at a slower pace.
Jobless claims fell, which is positive and from an employment perspective. It’s interesting to see a collection of economists feeling the US unemployment rate could test the Fed’s 6.5% ‘threshold’ as early as the next payrolls report on February 7. Unfortunately this would not be driven by organic job creation, but will be a by-product of people dropping out of the labour force on the back of the stalled talks to extend unemployment benefits.
60% of US companies have beaten on the earnings
US earnings have got off without any real fan fair as suggested. Certainly the moves in American Express and Intel in the post market suggest today’s cash session will be fairly ugly, with Intel gapping lower for the eighth earnings report in a row. Anyone hoping the market would beat recently lowered expectations would be moderately disappointed, although with only 9% of companies having reported thus far there’s still a way to go. So far a mere 60% of companies have beaten on the EPS line and I say ‘mere’ as we usually see around 70-75% of companies beating expectations and this has been a factor for many years. It begs the question whether sell-side analyst’s position expectations low so that stocks can do well. On the top line, 62% of S&P companies have beaten consensus, with 4.4% aggregate growth seen.
The Intel numbers clearly haven’t been well received, but it’s worth pointing out that GE announce earnings pre-market and the opposite earnings pedigree is true of this name, having beaten 10 of the last 12 reports. It isn’t cheap on 16x forward earnings and has a relatively flat earnings profile over the coming years, but from a macro perspective it is one of a collection of US stocks that needs to be paid attention to. I also like to look at narrative from Caterpillar, Freeport and Procter and Gamble, who are exposed not just too different geographies, but source revenue from various parts of economies.
China pulling back, again
The weak US lead has held Asia back. Markets are largely lower, notably in China where the CSI 300 is down 0.8%. The broader Shanghai Composite is testing the 2,000 level, with traders pointing to Neway Valve, who are trading 32% above its IPO price. Clearly this highlights the confidence the market has in new listings and given the amount of companies due to tap the market in the coming months, you can see why the market is struggling.
In the forex market there is no discernable trends, with the USD mixed. The ASX seems the regions outperformer, down 0.1%, although supporting the index has been a clear rotation in material names. The sector is up 1.9% and you’d imagine the index would be down much more if the space had been tarnished with the same brush as the financial space. However it’s clear that was never going to happen as fund managers have rotated out of financial into material names, helped largely by Citigroup upgrading the mining sector to a more attractive stance. Certainly RIO’s numbers have impressed enough to warrant a better feel good factor in the space and perhaps there will be sustained gains through 2014, rather than just a sector that is played by traders for short-term moves. Perhaps there is an investment case there to be made, but the fact that Citigroup has upgraded the mining sector for the first time in three years has been discussed on the desk.
Those who have followed Citigroup’s advice and bought into BHP, RIO & co should keep in mind that China will be in full focus next week and while the US has taken over as the epi-centre from which all other assets take their cues, the Chinese economy should be looked at closely next week, with the AUD, commodities and resource focused stocks at the heart of any move. The supply and future consolidation of credit has been the key talking point, but on Monday it’s all about Q4 GDP (expected to grow 7.6%), industrial production, retail sales and fixed asset investment.
AUD/USD has found no real love in the market today and despite being oversold has struggled to make any kind of upside traction. On the weekly chart the pair needs to close below 0.8865 to print a bearish reversal, although this is already at the trend low and therefore really suggests the upside is limited. On the daily chart a close (09:00 AEDT on Saturday) below the December 18 low of 0.8845 would be taken bearishly, although there are signs of divergence on the RSI’s.
European markets should open on a flat to positive footing, with plenty for traders to focus on. On the data side the US takes centre stage with December housing starts, building permits, industrial production and the University of Michigan sentiment index due. We also get to hear from Richmond Fed president Jeffery Lacker, who is very much on the hawkish side of the feds hawkish/dovish bias, although Mr Lacker has spoken a number of times of late, so his thoughts are known.
I will also be keeping an eye on EONIA (Europe money market rate), which at 30 basis points is elevated, so much that ECB member Coeure suggested the ECB were monitoring it. There are signs EUR/USD could really start breaking down, although it has to be said GBP/USD has broken its July uptrend and could test the series of October high (around 1.6250) if we get a weak December retail sales report today.
(Daily chart of GBP/USD)
Ahead of the European open we are calling the FTSE at 6830 +15, DAX 9727 +10, CAC 4329 +10, IBEX 10470 +15 and MIB 19901 +26