The Overnight Report: Earnings Jitters

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By Greg Peel

The Dow fell 64 points or 0.4% while the S&P lost 0.1% to 1845 and the Nasdaq was flat.

It was a sea of green on Bridge Street yesterday and perhaps some sort of an “oops” moment if one reflects on Tuesday’s rout. On Tuesday we snowballed down and yesterday we snowballed up and all up we showed that volumes are still a little holiday-thin. Not one sector went backwards, but interestingly we cannot say the rally was driven by the usual suspects. Materials certainly led the charge with a 2.6% gain and energy chimed in with 2%. But healthcare, which seems to no longer count as “defensive” these days, ran 2% and the worst performer on the day was financials with only a 0.5% gain. Perhaps after all this time the banks are returning to their “defensive” status based solely on yield support.

The resources sectors were buoyed by solid production reports from the likes of Rio Tinto ((RIO)) and Woodside ((WPL)) while another big drop in the Aussie also provided impetus. We love it when the Little Battler gets smacked on the head. Although perhaps we shouldn’t love why, in this case, as it had little to do with US dollar strength.

The loss of 31,600 full time jobs in December was a weak result by anyone’s measure. Over the last six months the Australian economy has created only 3,800 new jobs, CBA economists note, and lost 15,000 jobs net. The only reason the unemployment rate is steady on 5.8% is because the participation rate has fallen to its lowest level in seven years. While this reflects an ageing population (retirees) there is still a sizeable cohort of prime working age unemployed giving up the game.

CBA does not believe the jobs number ensures another RBA rate cut but believes it certainly increases the chances, and clearly the forex market likes that bet. The Aussie has fallen another cent to US$0.8817 over 24 hours.

Positive earnings results dominated the previous couple of sessions on Wall Street but last night Citigroup and Goldman Sachs (Dow) both posted poorly received results and their shares fell 4% and 2% respectively. In an indication of heightened market expectations, electronic retailer and 2013 outperformer Best Buy announced an unexpected 0.9% fall in comparable sales and its shares were slaughtered 28%.

There was little wrong with US economic data releases last night, so market weakness was all about sudden earnings trepidation. Housing market sentiment has fallen this month but only to 56 from 57, with numbers above 50 indicating positive sentiment. The Philadelphia Fed manufacturing index rose to 9.4 from 6.4 last month.

The CPI rose 0.3% in December to mark its strongest gain in five months. While an inflation pick-up is enough to make the bond market jittery, the 2013 headline CPI finished at 1.5%, down from 2012’s 1.7%. The Fed will not even blink until it reaches 2%.

The earnings picture for the session did not improve after the bell. Dow components Intel and American Express both posted slight misses and the shares of both initially fell 2% in the after-market.

The US dollar index dropped 0.1% last night to 80.90 (which puts the Aussie plunge into perspective) while gold regained what it lost yesterday to tick up to US$1242.60/oz.

Base metals had a mixed session on sub-1% moves, with copper down 0.5%.

Spot iron ore fell US$1.30 to US$128.30/t. Chinese steelmakers winding down their purchases ahead of New Year?

Crude oil barely moved, leaving Brent at US$107.09/bbl on the expiry of the February delivery contract and West Texas at US$94.10/bbl.

While the Dow may have fallen a bit last night, the broad market S&P didn’t fall much, ensuring only a 4 point fall in the SPI Overnight.

Santos ((STO)) will report its production numbers today.
 

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