The Overnight Report: Banking On A Positive Result

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By Greg Peel

The Dow rose 95 points, or 0.7%, while the S&P gained 0.8% to 1440 and the Nasdaq added 0.7%. Last night was unusual in that it provided a rare positive session on a Monday, and in avoiding a recently typical afternoon sell-off.

Chinese inflation, released yesterday, came in at 1.9% annual for September, down from 2.0% in August. The quiet easing in Chinese inflation over the year owes a lot to well behaved food prices, which make up one third of China's CPI basket. There was a fear higher grain prices arising from the US drought would have an impact, but those prices have since eased and lower vegetable prices brought the food inflation component down to 2.5% from 3.4% in August.

While Chinese policy remains elusive in any big way at present, despite universally held assumptions Beijing would have been madly easing by now, contained inflation at least provides the PBoC with the firepower. Expectations for changes in policy have now shifted to the March quarter after the new year change of regime. China's September quarter GDP will be released on Thursday.

History suggests you can't have a rally on Wall Street if you don't have strength in US banks, and last night Citigroup earnings beat expectations to drive its shares up over 5% and buoy the entire banking sector. In an indication of how far analyst forecasts have been marked down to provide upside surprises, Citi's profit fell 88% from September 2011. This figure did include write-downs of debt and the fire sale of a brokerage firm, so traders concentrated on the “clean” number, which outperformed.

We've only had a handful of major results so far in the season, but already commentators are suggesting that perhaps net earnings growth for the S&P 500 won't be negative as feared, and if so, the result would represent a trough in the quarter. Such a view was supported last night by the September retail sales number, which showed 1.1% growth against expectations of 0.9%. It was back-to-school month, albeit the figures are seasonally adjusted, and commentators pointed to the successful launch of the iPhone5 in the period.

It's doom and gloom one minute and party time the next, with talk now of the Fed having to raise its cash rate well before the “at least to 2015” schedule as the US economy improves. JP Morgan's Jamie Dimon is convinced this will be the case, and last night's sales figures have sparked more similar discussion. Smiles turn to scowls fairly quickly, however, when Wall Street is reminded of the upcoming fiscal cliff. Yesterday, Austria's Felix Baumgartner demonstrated to Americans how they can be prepared for this event.

Some of the gloss came off with the release of this month's Empire State manufacturing index, which showed ongoing contraction on a result of minus 6.2. However, this is better than last month's minus 10.4, suggesting the pace of contraction is slowing.

And we have a long way to go in the earnings season, with this week and next particularly busy. Tonight alone sees results from Dow components Coca-Cola, Johnson & Johnson, Intel and IBM, along with leading investment bank Goldman Sachs. Earnings are one thing, but they are history. Ongoing guidance is key, but guidance is uncertain due to said cliff, and the election in general.

EU leaders will meet in Brussels for a two-day summit beginning Thursday, so there is unlikely to be much in the way of new news out of Europe before then. Note that Wall Street tends to be positive when it can be domestically-focused without disruption from the latest euro-dithering. The meeting itself is not, however, expected to deliver much anyway. It is a regular meeting, rather than an extraordinary one, and markets have begun to resign themselves to the expectation that Spain won't do anything until next month.

The US dollar index was thus flat last night at 79.69 and the Aussie is up a tad to US$1.0256. Base metal prices drifted a little lower last night, but as I noted yesterday, it's LME week and no one much is actually trading. The Chinese spot iron ore price continues to drift after its sharp rebound however, yesterday falling another US$1.50 to US$113.00/t.

West Texas crude slipped US19c to US$91.67/bbl, while Brent jumped US$1.13 to US$115.80/bbl, but the Brent November delivery contract is about to expire. Backwardation has December US$1.40 lower.

That just leaves gold, and it's a fairly safe bet that gold never makes a sharp move in either direction only one day in a row. Adjustments can usually take two to three days before the dust settles, and last night gold fell US$17.10 to US$1737.40/oz. Not helping gold at the moment is all this talk, arguably very premature, that the Fed will have to start exiting its QE strategies sooner rather than later on US economic strength.

The SPI Overnight rose 30 points or 0.7%.

The RBA will provide more colour today on why it decided to cut its cash rate at its meeting this month in the form of the release of the minutes. Fortescue ((FMG)) and Rio Tinto ((RIO)) will provide September quarter production reports.

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