Daily Market Reports | Jan 14 2014
By Greg Peel
The Dow fell 179 points or 1.1% while the S&P lost 1.3% to 1819 and the Nasdaq dropped 1.5%.
Atlanta Fed president Dennis Lockhart is a regular on the Fed-speak circuit despite not being an FOMC voting member and has hasn’t wasted much time in 2014. Looks like we’re in for another year of Fedhead-driven paranoia and volatility. Lockhart told a Rotary lunch last night he supported “similar tapering steps” ahead to the US$10bn cut made in December as long as the US economy continues to grow in the 2.5-3.0% range. Coming on the back of Friday’s shock jobs report, this was not what Wall Street expected to hear.
Lockhart went on to say he believed the US economy was currently not as strong as 6.7% unemployment suggests (note that 62.8% participation rate is the lowest level since the recession years of the 1970s and is fighting the ebb-tide of an ageing workforce) and that disinflation could pose a risk. Qualification didn’t matter – US stocks accelerated south on the back of Lockhart’s comments.
Not helping the cause in January is growing fear of a weak US earnings December quarter season ahead. Some 88% of S&P 500 individual profit outlooks for the quarter have been negative. The financial sector is expected to be somewhat of a saviour, forecast to post an earnings growth rate of 22.6% against an average for the 500 of 6.1%. But it is notable that a significant proportion of bank profits will be derived from job cuts and financial engineering – measures that cannot go on forever.
And last night we had Goldman Sachs doing that which it does so well – move markets. Goldman suggested the current PE on the S&P 500 is about as high as it can get for the time being, at around 16x, which is up from a low of 10.6x in September 2011 (a 51% rally). Wall Street is of the belief the PE can reach 17 or 18x, but Goldman disagrees. However, a multiple expansion does not have to occur for the stock market to rally, and indeed Goldman is forecasting an S&P 500 of 1900 by year-end. This requires earnings (the E in PE) to grow.
See above.
So put that all together and Wall Street somewhat lost its bottle last night. One presumes the Fed will not be tapering again too quickly until it is clear whether or not the weak jobs report was a one-off, and in the meantime we have the quarterly earnings season to wade through. Therein lies the immediate key.
The US jobs report has been of no help to the Australian stock market either. Aside from Wall Street’s gravitational pull, the Aussie is up another 0.7% to US$0.9061 having traded in the 88s only last week. The Aussie is rising as the greenback falls – down 0.2% to 80.50 on its index last night – while gold continues to rally and gained another US$4.30 to US$1252.90/oz. US bonds are also back in favour, with the ten-year yield falling another 3bps to 2.83%.
Indonesia’s exports bans, announced on the weekend, continue to impact on the metals markets. And the weaker greenback helps. The ban affects nickel and bauxite and not copper, lead, zinc or iron ore, at least until 2017. Nickel has thus been running up hard on short covering and was up another 3% last night. Aluminium was up 0.5% but is not reacting too sharply to the bauxite ban given abundant aluminium supply. The others were nevertheless also stronger.
Spot iron ore rose US20c to US$130.90/t.
Last night Iran and The West agreed to a cap to Tehran’s nuclear program in return for an easing of sanctions. Oil prices subsequently gave back their gains of Friday night. Brent fell US73c to US$106.72/bbl and West Texas fell US$1.09 to US$91.63/bbl.
Looks like we could be in for a weak one on Bridge Street today, with the SPI Overnight down 48 points or 0.9%. Mind you, half the market is still on holidays and volumes are low at present.
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