Daily Market Reports | Jan 13 2010
By Rudi Filapek-Vandyck
It had to happen eventually. Last night US shares ended their uninterrupted winning streak into 2010. The Dow lost 0.34% (-36.73) to close at 10,627.26. The S&P500 lost 10.84 pts (nearly 1%) to 1136.14 and the Nasdaq closed down 30.10 to 2282.31.
The Australian SPI 200 Mar 10 futures contract is at present down 55 points or 1.1% to 4836.
Prime catalysts for the reversal were disappointing profit results and that is a worry if one takes into account current rich valuations and high expectations for US corporate profits going forward. In addition, investor focus turned to the inevitable conclusion that governments and central banks across the globe will increasingly start looking at reining in abundant liquidity and potential asset bubbles, and that will make this year’s share market scenarios a lot less straightforward.
As reported in yesterday’s Overnight Report, after the closing bell on Monday (US time) resources bellwether Alcoa stepped into the global limelight with a disappointing quarterly profit (excluding abnormal items) of US1c – that wasn’t even near the US6c the market was expecting. Alcoa shares came under severe selling pressure in Tuesday’s session. But more importantly, the impact of Alcoa’s profit miss was felt across the globe as investors were reminded the hard way that resources companies, such as Alcoa, do not only have revenues to report, but also costs (which do impact on the bottom line).
Time to put out a reminder to Australian investors too: cast your memory back to the last reporting season, in August last year. Which sectors generated the most disappointing profit releases? Energy and resources, especially the mid-tier players in both sectors.
The message came home two-fold yesterday after Chevron, the second-largest US energy producer, in effect issued a profit warning by announcing that earnings for Q4 of 2009 are expected to be lower than in Q3. Downstream results are expected to be “sharply lower, mainly due to significantly weaker refining margins”.
Materials and energy stocks were out of favour last night, but the reverberations of disappointments by Alcoa and Chevron reached wider as investors were reminded that markets have bounced some 60% from last year’s lows and to continue this trend corporate profits will have to start matching analyst expectations.
Equally, and as mentioned in yesterday’s Overnight Report, plans by the Obama administration to introduce an extra tax for the banks weighed on share prices of the likes of JPMorgan Chase (also due to report this week).
According to media reports in the US, current analysts’ projections for the fourth quarter are for profits to have risen some 200% compared with twelve months ago. While this is as much a reflection of how steep the fall in profits was late in 2008, it is also indicative of how high expectations have risen in the meantime.
Other profit releases proved mixed. Supermarket operators Great Atlantic and Pacific Tea and Supervalu each reported third-quarter results. Great Atlantic posted a wider-than-expected loss, thus delivering another disappointment, and its shares fell by double-digits. However, Supervalu beat analysts’ estimates and its shares went up. Homebuilder KB Home equally beat market expectations.
The US Commerce Department said the trade gap widened in November, to US$36.4bn, from October’s upwardly revised estimate of US$33.2bn. Economists had been expecting a deficit of US$34.5bn.
US Treasuries and the US dollar were bid last night in a knee-jerk response to the aforementioned corporate disappointments. The rally in US bonds pushed yields down to 0.91% for the 2-year segment. The yield on 10-yrs declined 10 bps to 3.72%.
News from Japan that Japan Airlines is likely to go bankrupt without the Japanese government guaranteeing a bail-out put airline stocks globally under pressure. News from China was (for once) equally unhelpful.
China raised the proportion of deposits that banks must set aside for reserves by 50 bp to 16% for big banks and 14% for smaller ones effective January 18. The increase in reserve requirements is the first since June 2008. The People’s Bank of China (PBOC) also sold bills at a higher yield for the second time in a week. The news fuelled market speculation that policy makers in China will raise the benchmark interest rate in the first half of this year.
Someone’s about to take away the punchbowl at the global liquidity party and investors didn’t like it. The PBOC said last week it is aiming for “moderate” credit growth in 2010 after a record 9.21 trillion yuan of loans in the first 11 months of 2009. On the other hand, India’s November industrial production surged a larger-than-expected 11.7% y/y, marking the fastest pace in over two years. One is left wondering whether this is the turning point in the cycle when good news becomes not so good as it strengthens the case for central banks to raise interest rates some time this year.
Market experts remain divided about what exactly calendar 2010 will bring investors overall. St Louis Fed President Bullard went public last night by declaring he expects positive US job growth in the first half of this year. This can be interpreted in a positive way, but also as a negative given the inverse correlation between the US dollar and risk assets that has thus far remained intact. Another positive was the prediction from Citigroup that global equities will rise 20% within two years as corporate earnings should recover strongly.
Citigroup’s prediction was offset by the prediction by Credit Suisse that the S&P500 index may decline as much as 10% this year as the US government shores up its finances with higher taxes because the budget gap isn’t sustainable. According to Credit Suisse, “this will be a significant drag on growth in general, and profit margins in particular”. On top of Credit Suisse’s rather dire prediction came the prediction from Moody’s Investors Service that the global economy may face a sluggish recovery this year as governments globally struggle to push down budget deficits and unemployment.
As stated earlier, the overall reversal in risk appetite benefited the greenback, as well as US Treasuries, and both exerted a negative influence on US equities. On Monday, the US dollar index fell to a three-week low. Tuesday’s bounce came despite a prediction by JPMorgan Chase that the US dollar will decline through Q4 earnings season with investors seen abandoning bets that the Fed will bring forward interest-rate increases. On the other hand, Kansas City Fed President Hoenig went public by stating last week’s payrolls report doesn’t change his outlook for a “modest” and “persistent” recovery and that a 10% jobless rate will not keep the Fed from raising interest rates.
A firmer US dollar translates into a weaker AUD and yesterday thus saw the usual scenarios unfold. AUD/USD dipped to 0.9170 before recovering to around 0.92. AUD/EUR slipped to around 0.6350, while AUD/GBP declined below 0.57 for the first time in five days. FX traders report moves lower in AUD/JPY and AUD/NZD have found good support around 83.40 and 1.2440 respectively.
The US dollar bounce equally had its usual effect on commodity markets. Crude oil in particular took a hit last night. Not helping crude oil prices was the fact the US Energy Department lowered its outlook for global oil consumption in 2010 to 85.18 million barrels a day from 85.22 million in December. WTI futures contract for February fell 2.1% to US$80.76 a barrel. Brent futures fell below US$80 per barrel.
Following on from the prediction by Bank of America Merrill Lynch that crude oil prices may potentially break through US$100 a barrel into 2011 came the news that analysts at Citi had raised their long-term crude oil price forecast to US$80 a barrel from US$65 previously. Citi forecasts crude oil prices will average US$76 a barrel this calendar year.
After the close of trading on Tuesday, the American Petroleum Institute will release weekly inventory data. The Street.com reports analysts polled by Platts expect to see an increase of 1.9 million barrels to crude stockpiles for the week ended January 8 and a 1.6 million-barrel build in gasoline supplies. Distillate supplies, meanwhile, are projected to decrease by 1.7 million barrels. The run rate is expected to hold at 79.86%.
Spot gold fell 2.1% to US$1,127.13 an ounce. LME copper decreased 1.5% to US$7455/t. Other base metal futures equally traded negative with zinc, aluminium, lead and nickel decreasing 3.8%, 2.1%, 3.9% and 1.1%, respectively.
US corn dipped 7.1% after the US said farmers harvested a record crop and projected bigger global inventories before the next harvest. Soybeans declined 2.9% and wheat fell 6.3% after a US government report showed stockpiles rose and global output increased. Sugar increased 2.3% on signs that countries including India would increase purchases to ease tight inventories. Palm oil futures were 0.4% lower.
Greg Peel will be back by the end of the month.
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