The Overnight Report: Earnings Cloud Rolls Into View

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By Greg Peel

The Dow closed up 12 points, or 0.1%, while the S&P gained 0.4% to 1450 as the Nasdaq jumped 0.6%.

It was global service sector PMI day yesterday, and the worst result of all kicked off the proceedings. Following on from a very weak manufacturing PMI release on Monday, yesterday's Australian services PMI showed a fall to 41.9 in September from 42.4 in August – a level of rapid contraction. The shrinking financial services industry in particular has impacted on the figure and retrenchments are unlikely to be showing up in the official unemployment rate.

To add insult to injury, Australia's trade deficit blew out in August after a 3% fall in the dollar value of exports and only a 1% fall in imports.

It's China's manufacturing industry that is meant to suck up our exports and there the sector remains in slight contraction. China's service sector had been the fast growing offset in prior months, but recent results have shown the pace of non-manufacturing expansion slowing. Yesterday, the official number showed a fall to 53.7 from 56.3, while HSBC's independent survey showed 52.0, down from 53.1.

The eurozone continued to slide, with a drop to 46.1 from 47.2, while the apparent rebound honeymoon is over in the UK after its PMI dropped to 52.2 from 53.7. It was thus left to the US service sector to post the only improvement for the month, and improvement into solid expansion territory. The US PMI rose to 55.1 from 53.7.

Adding to the positive tone in the US was last night's ADP private sector jobs report for September, which showed an increase of 162,000 new jobs when 140,000 were expected. The real numbers are out on Friday night with non-farm payrolls, and Wall Street has become wary of reading too much into the ADP results. Between the PMI and the ADP however, the Dow managed to be up 51 points by midday. Apple continued to regain ground, which is why the Nasdaq was strong and the S&P was dragged along in the slipstream.

But if the “new tech” world of Apple is on the ascendancy, the “old tech” world of PC-maker and Dow component Hewlett Packard should in theory be a victim. Last night HP delivered fresh earnings guidance for 2013, and suffice to say HP shares closed down over 12%. Hewlett Packard shares are down 50% from their February high.

With the US quarterly earnings result season at the door, this news sent Wall Street reeling. And then around about the same time, a drifting Brent crude broke down through its 200-day moving average and West Texas followed. The technical selling triggered belied the weekly US inventory data, which showed a decrease, and soon it was a stampede. Brent closed down US$3.17 to US$108.17/bbl and West Texas fell US$3.91, or over 4% to US$87.98/bbl. In subsequent electronic trading, prices are lower still.

Fundamentally, the oil price should be lower rather than higher on the basis of demand expectations. Monday's global manufacturing PMIs are just one set of data providing a hint. Yet as the war of words between Israel and Iran flares up every month, in come the speculators. They have to be wary, because the US and UK governments are ready to release strategic reserves together if they have to. When the rhetoric over sanctions and pre-emptive attacks dies down again for the time being, oil loses its momentum, resulting in sessions like last night's.

With Spain still playing politics by shrugging of any bail-out request, the euro was again lower last night, pushing the US dollar index up 0.2% to 79.94 with the help of the positive US data. The stronger greenback helped give oil a nudge, but this was not reflected in base metal prices, which saw insignificant moves. Gold appears to be consolidating again for the moment, as it rose US$4.00 to US$1778.20/oz.

The Aussie is down another half a cent to US$1.0214 having tested out support below the 102 level. Yesterday's PMI and trade data gave the currency another shove and again encouraged talk of another RBA rate cut on Cup Day. And of course, all media attention was focused on when or if the Big Banks might drop their mortgage rates, and by how much. What the sensationalist media either is ignorant of or chooses to ignore, however, is the new regime.

The banks are attempting to disconnect their lending rates with the RBA rate, and particularly the 20-year mortgage rate compared to the 24 hour rate. ANZ ((ANZ)) now resets rates only on the second Friday of the month, so it won't pipe up till next week, while NAB ((NAB)) has committed to having the lowest SVR, so it will have to wait until at least the week after. That leaves Westpac ((WBC)) and CBA ((CBA)), but all banks are cognisant of maintaining solid domestic deposit levels to offset the risks inherit in offshore funding, hence they may not wish to drop deposit rates at all or at least not by much. To maintain margins, which are already under pressure, the banks thus may not give way on their mortgage rates. The level of mortgages in Australia now roughly equates to the level of deposits.

So sorry Wayne/Joe, your mortgage belt, swing-seat targeted rants may get you nowhere.

The SPI Overnight was up 13 points, or 0.3%, despite the assumption the local energy sector will be under pressure today. There's a bit of a “QE” thing going on in Australia at present, given weakening local data are only resulting in a stronger share market. It's the “bad news is good news” theme we've come to know and love from the Yanks, with expectations of more RBA action fuelling the fire.

We'll see how we go with the local August retail sales result out today. Tonight sees an ECB policy meeting, but presumably there's little more Draghi can say or do at this point while Rajoy plays cat and mouse. The minutes of the last Fed meeting are also out tonight, from which Wall Street will be looking for more colour on the new unlimited QE policy.

Rudi will appear on Sky Business today at noon, and again for the Switzer Super Report at 7pm.

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