The Overnight Report: Retailers Fight Back

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By Greg Peel

The Dow rose 82 points or 0.9% while the S&P clawed back 1.0%  to 989 and the Nasdaq added 1.3%.

Outside of the scare created by the big drop in the Shanghai market on Monday, Wall Street’s big drop on Monday included impetus from a poor second quarter earnings result and ongoing guidance from retailing giant Lowe’s. The Street then held its breath in the knowledge three more large retailers would be reporting on Tuesday, being Dow component Home Depot (everything for your home), discount chain Target and luxury department store chain Saks.

Home Depot posted a fall in profit from last year but not by as much as the Street expected. Importantly, it lifted full year profit guidance thus sparking a 3% rally in its shares. It was a similar story for Target, leading to a 7.5% share price increase. Unlike the other two, Saks extended its losses in comparison to the second quarter last year but still beat estimates, sending its shares up 7%.

On Monday Wall Street worried that the Lowe’s result was indicative of ongoing weakness in the retail sector, suggesting a recovery might be more muted than the stock market was suggesting. By last night the Street was beginning to think perhaps Lowe’s just hadn’t managed the downturn as well as others. Signs are thus mixed, but enough to provide at least some recovery from yesterday’s falls.

There was also well-received news on the housing front. Housing starts fell 1.0% in July but it was the break-down of the numbers that was encouraging. With developers struggling to secure financing, starts of multi-family (apartment block) homes fell 13.3% in July to continue a downward trend. But starts of single-family homes jumped 1.7% to mark the fifth consecutive monthly rise. This was the part Wall Street liked. And permits to start new family homes jumped 5.8% for a fourth consecutive monthly gain.

What was somewhat troubling for Wall Street was a 0.9% fall in the July producer price index (PPI) following a 1.8% gain in June. Too much inflation is a bad thing because it means higher interest rates but a little bit of inflation is a good thing because it indicates a healthy economy. Falling inflation, on the other hand, implies deflationary forces are still at work as indicated by producers struggling to find demand for their products. Economies cannot grow in a deflationary environment.

So it was a day in which traders cherry-picked the good news from the not so good news and once again talk of all that cash still on the sidelines came into play. What went down on Monday mostly went up on Tuesday. A piece of news that was lost in the sell-off on Monday was a dip in the trend of rising credit card defaults, and that ensured major commercial bank stocks bounced back hard last night.

The dollar lost ground once more, falling to 78.98 on the index, sending gold up US$5.20 to US$938.10/oz and the Aussie back up half a cent to US$0.8267.

Oil recovered strongly, posting a US$2.44 gain to US$69.19/bbl.

Base metals nevertheless showed signs of lethargy on the buy-side last night as they failed to hang on to earlier gains. Oil may have jumped 3.6% but only aluminium managed to finish in the black with a 1% gain, while copper lead and zinc posted small drops, tin fell 1.5% and nickel 2.5%.

The VIX volatility index has been having a torrid time of late, jumping 14% on Monday to be over 28 at one point as investors rushed into protection ahead of a possible general pull-back, but on Wall Street’s bounce last night the VIX gave back 6% to 26. It is notable that the lowest point in the VIX has been 24, posted in July just before the second leg of the rally. As another surge proceeded, the index actually pushed a bit higher, indicating nervousness among those long stock.

A read in the VIX under 20 is considered to indicate complacency on Wall Street. Despite a strong rally, no one is yet overly complacent. An interesting factor of a strong demand for put option insurance is that it alleviates the need to sell stocks if there actually is a pull-back (other than market-makers hedging their short option positions). This can have a dampening effect on such corrections.

The SPI Overnight added 23 points or 0.5% after Australia put in a resilient effort yesterday amidst some well-received local earnings reports.

After the bell on Wall Street, Computer giant and Dow component Hewlett Packard posted its second quarter result which beat the Street on both the earnings and revenue lines. While this might signal a good start for Wall Street tonight, HP shares have surged from their lows in March and kicked further in anticipation following good results from peers such as IBM and Intel. HP shares are down 2% in the after-market, no doubt indicating some “sell the fact”.

It’s a busy day for high-cap stocks in the local earnings season today. Reporters include Qantas ((QAN)), Amcor ((AMC)), Boral ((BLD)), Woodside ((WPL)) and JB HiFi ((JBH)) to name but a few.

For the full list of reporting dates and major economic data releases please refer to the FNArena calendar.

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