Daily Market Reports | Oct 05 2010
By Greg Peel
The Dow fell 78 points or 0.7% while the S&P lost 0.8% to 1137 and the Nasdaq dropped 1.1%.
Having arguably already built a QE2 premium into valuations over the month of September, October's focus turns to the third quarter earnings season. Wall Street can debate the likelihood and merits or otherwise of QE2 until it's blue in the face, but at the end of the day it matters only whether companies are actually making money.
To that end, Wall Street is expecting around a 30% increase in year-on-year earnings to be reported this quarter but only about a 6% increase in revenues. Both figures are largely consistent with the second quarter, and it should be noted this is the last quarter for which the season is “cycling” a recession. It was in the fourth quarter '09 that US GDP shot up 5.2%.
That weak revenue figure remains a concern as it implies that while US companies continue to cut costs and increase productivity, thus increasing margins, they're not really selling much to the end-consumer. Consumption holds the key, and consumption is linked to unemployment. The latest unemployment data are out on Friday.
On Friday morning Sydney time, after the bell on Wall Street, Alcoa will announce its third quarter result and the season will officially begin. The banks start to follow next week and then all hell breaks loose in the ensuing couple of weeks.
Citing ongoing weakness in alumina prices, Deutsche Bank last night downgraded Alcoa to Sell, while sluggish PC sales were cited as the reason why Goldman Sachs last night downgraded Microsoft to Hold. American Express announced it planned to fight an antitrust suit in the courts, and together all three Dow components set the scene for a weak start to October.
Economic data were once again mixed last night. August factory orders fell 0.5% when 0.4% was expected but August pending home sales were more comforting, rising 4.3%. The pending home sales index has now reached 82.3. One year ago it stood at 103.0.
Unease continued to resurface in Europe overnight as the Irish government slashed its earlier economic growth forecast and announced further budget cuts. Spain's unemployment result was higher than expected, and a prominent economist warned that overly aggressive budget cutting threatened to send Europe back into recession and threatened to fracture the euro as a currency.
The result was a 0.8% fall in the euro to US$1.3680 and thus a 0.5% increase in the US dollar index to 78.45. The Aussie fell in with a half cent drop to US$0.9678.
Gold thus slipped back US$4.00 to US$1314.60/oz while commodity prices were mostly lower, albeit only modestly so. Oil was down US11c to US$81.47/bbl and copper fell 0.5%.
The SPI Overnight fell 24 points or 0.5%.
It's a big day on the economic front in Australia today. At 2.30pm the RBA will make its rate decision and one has to believe the odds have swung back slightly in favour of no hike this month. Recent data have been to the weaker side, including yesterday's TD Securities inflation gauge which slipped for the first time in several months. Nevertheless, economists and the futures market are still leaning towards a 25bp hike.
The RBA will have a rush of late data to help in its decision which will be posted at 2.30pm. Ahead of the release we have ANZ job ads, the NAB business sentiment survey, retail sales and the service sector PMI.
There will also be service sector PMI results from China, the UK, EU and US as the earth revolves today.
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