The Overnight Report: Back To Earnings

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By Greg Peel

The Dow closed down 85 points or 0.5% while the S&P lost 0.2% to 2097 as the Nasdaq rose 0.4%.

Glenn has a go

From the opening bell yesterday, the ASX200 was up 55 points, having closed down 44 points on Monday. Perhaps someone could explain to me what was going through traders’ heads, if anything, on Monday. Rallies across the globe on Monday night were all about Chinese stimulus. We had our chance, but somehow became clueless.

The pullback yesterday to an ultimate close of up 39 points began with the late morning release of the minutes of the April RBA meeting. They made for interesting reading.

The Australian economy continues to grow “somewhat below trend”, the central bank noted. Household consumption and construction were being fuelled by low interest rates. Exports are actually growing, but “a significant pick-up in non-mining business investment was yet to occur and several indicators suggested it would remain subdued for longer than had earlier been anticipated. At the same time, the recent declines in bulk commodity prices could, at the margin, lead to a larger-than-expected fall in mining investment and some decline in the production of iron ore and coal.”

This would tend to suggest another rate cut is needed. But then there’s the issue of house prices. Here the RBA was circumspect, noting it’s all about Sydney and nowhere else and there are other measures being considered to address this. Hence, one assumes there’s nothing standing in the way of another rate cut.

Except for one thing.

“In considering whether or not to reduce the cash rate further at this meeting, members discussed the various channels through which monetary policy was affecting the economy at present, including the asset price and exchange rate channels. In assessing the operation of the cash flow channel in particular, they noted that the responsiveness of borrowers and savers to changes in interest rates and asset prices was unusually uncertain in a world of very low interest rates and high household leverage”. [My emphasis]

In short, the RBA is suggesting that down at these historically low levels, further cuts to the cash rate have a diminishing impact. Already leveraged-up households do not see another cut as a reason to slam the credit card. Businesses looking at a subdued economic outlook do not see another 25 bips as a green light to undertake capital expenditure. The conclusion from economists is that one more cut will come – and the board noted it wanted to have a look at the inflation numbers due today – but 2.0% would be it. Beyond that, further cuts are of little value.

So what can be done beyond 2.0%? Well last night Glenn Stevens made his point in a speech in New York. Governments have to step up to the plate, he said in not so many words. Monetary policy is not a panacea. “A balance has to be found,” he suggested, between monetary policy and fiscal policy.

Good luck with that.

Mixed Micro

Wall Street took a step away from the pervading macro issues of Greece and China last night to concentrate on the micro of earnings results and M&A activity. A slew of earnings reports painted a negative picture in the session, with Dow stocks DuPont (down 3%) and Travellers (down 4%) among the highlights. Travellers came off a strong previous quarter but for DuPont, it was all about the strong US dollar.

Meanwhile, another takeover bid in the US biotech space – this one hostile – again lit a fire under the sector as investors wondered who the next candidates may be. The Nasdaq is heavily laden with biotechs, hence its counter rally last night.

As the earnings results roll in, Wall Street is concerned that the story is yet to change in the years post-GFC. Companies are mostly beating already well downgraded analyst earnings forecasts but they are not beating on revenues, which suggests cost-cutting is still prevalent and still the major earnings driver.

Eventually there will be no more costs left to cut. Banks will have no further provisions to bring back as earnings. US companies will need to grow revenues at a time the US dollar is strong and likely to get stronger as the Fed moves towards its first rate hike. US stock PEs are not at “expensive” levels but they are getting up there, which begs the question of what, if anything, can drive them higher once the stimulus goes into reverse.

Commodity Capers

I have noted previously that the currently very volatile oil price tends to jump every time the weekly US rig count comes out and then drop every time the weekly US inventory numbers come out. Last night it was the turn of the inventories, and while at some point the market expects the rig count reduction to flow through to diminished supply, it didn’t happen last week.

Inventories rose, and West Texas fell US$1.16 to US$55.26/bbl. Brent fell US$1.69 to US$61.81/bbl.

Tin is the most illiquid of the base metals and it has been flying all over the shop of late. Having been trashed last week, a snap-back saw tin up 5% last night on the LME. The other metals were mixed, with copper falling 1% and zinc rising 1%.

Iron ore is steady at US$50.80/t.

Gold is currently spending every day bouncing back and forward across the 1200 level. The US dollar index was steady last night at 97.98 and gold rose US$6.00 to US$1201.80/oz.

The Aussie is down 0.2% at US$0.7709.

Today

The SPI Overnight closed down 21 points or 0.4%, just to keep the rollercoaster greased.

Today sees Australia’s March quarter inflation data, and no one will be watching more keenly than the RBA. Economists expect a 0.2% rise in the headline CPI, matching December, for a 1.3% annual rate, down from 1.7% in December. The trimmed mean or “core” annual rate, relevant to the RBA, is expected to remain steady at 2.2%.

BHP Billiton ((BHP)) releases its March quarter production report today as do Independence Group ((IGO)), PanAust ((PNA)) and Perseus Mining ((PRU)).

Rudi will appear on Sky Business's Market Moves, 5.30-6pm.
 

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