The Overnight Report: IBM, Goldman Sachs and Chinese Inflation

This story features BHP GROUP LIMITED, and other companies. For more info SHARE ANALYSIS: BHP

By Rudi Filapek-Vandyck

DJIA closed 0.2% lower at 11812, the S&P 500 fell 1.1% to 1280, and the Nasdaq declined 1.6% to 2721.

Disappointing results from Goldman Sachs and Wells Fargo and sharp pull backs in commodity prices set the tone for equity markets overnight. As it became clear towards the close of markets in the US that Wednesday would see no continuation of the positive trend so far this month, investors decided to take more profits off the table, exacerbating the losses for the day. The next few sessions will have to provide clarity whether today's losses are just a one-off or a sign that overall risk appetite had once again run up too high, opening the gate towards a more pronounced pull back.

A key matter today will thus be the release of Chinese economic data for the fourth quarter of 2010. Chinese GDP for calendar 2010 is likely to have remained close to 10% and consumer spending doesn't really make such a big difference just yet over there, so investors are likely to focus on what the official inflation (CPI) number will print today. Some China watchers are expecting a CPI growth number in excess of 5%. Market consensus seems to sit around 4.6%. Rumours swirling across the globe had it today's CPI release will surprise to the downside. In November Chinese inflation printed 5.1%. We will all be wiser later today.

US economic data in the US added to the negative sentiment with housing starts falling 4.3% to 529k, well below market expectations of 550k and the lowest level seen in over a year. Some commentators tried to highlight that both corporate disappointments delivered by Citigroup and Goldman Sachs this week are merely market trading related and they thus cannot be upheld as benchmarks for the economic recovery in the US overall, but there are plenty of others out there who continue highlighting there's plenty to not get excited about (so far) about the present corporate results season in the US with cost cutting still featuring in many reports released. Obviously, this was not the case in reports issued by technology bellwethers IBM and Apple after the close of the previous session. However, in yesterday's session this proved not enough to offset the new negatives.

These negatives include the fact that copper nearly put a so-called Bearish Reversal Outside Day on price charts. This happens when the price rallies to a new high (as copper did yesterday) but subsequently falls back to a price levels below the prior day's. This nearly happened for copper and sure enough many a commentator is mentioning the fact this morning. Copper will attract investors' attention today, so much is certain.

Weaker financials and commodity stocks equally featured prominently in Europe with the German DAX closing the session 0.8% lower at 7083, the Euro Stoxx 50 weakening 0.7% to 2924 and the FTSE 100 falling back below the 6000 level to 5977.

SPI futures in Australia this morning are indicating a good old fashioned down day should be expected for the local bourse, with indicated losses at the opening of around 1%.

The Australian dollar put in a strong rally first on FX markets, but has subsequently seen a firm pull back below parity (again). AUD opens the Asian session at .9994, AUD/EUR opens at .7422, AUD/GBP opens at .6249, AUD/NZD 1.2982 and AUD/JPY opens at 81.99.

As said above, LME trading saw copper rising to a record high of USD9781 per tonne in intraday trade before finishing the session 1.3% lower with some experts pointing into the direction of the softer US housing starts figures. Lead was hit hard, falling 3.5% as LME stocks rose, while zinc (-1.9%), nickel (-1.6%) and aluminium (-0.8%) all joined in the falls.

Amongst agricultural commodities, corn declined 2.8% after rising to a 30-month high in yesterday's session, but signs of rising demand for US exports of wheat lifted prices by 0.5%, although threats of strike action by Argentine farmers capped gains and weighed on corn and soybean (-0.1%) prices. Palm oil outperformed, rising 1.7%, while sugar rose 0.2%.

Spot gold also enjoyed an early rally, boosted by a weaker USD, but the subsequent retreat has moved prices back towards the previous day's USD1368 per ounce. Crude oil prices continue doing it tough. Overnight the WTI futures contract for February fell 0.7% to USD90.75 per barrel. Brent crude continues to trade at around a 10% premium to the benchmark WTI due to the divergence in relative supply; North Sea supply remains tight (Brent) versus rising inventories of WTI in Cushing in the US.

Most commodity prices have so far enjoyed a strong performance this month, carried by ongoing USD weakness and stockbrokers (significantly) lifting price forecasts for the new calendar year.

US Treasuries rallied. The 2-year yield fell 1.6bps to 0.568% and the 10-year yield fell 3.1bps to 3.335%.

As expected, a lot of media attention goes out today to the arrival of the Chinese President in the US. Tonight in the US, the key releases are the weekly jobless claims, December existing home sales and the January Philadelphia Fed manufacturing survey. Share prices for BHP Billiton ((BHP)) and Rio Tinto ((RIO)) recorded large losses overnight. The former will today release December quarter production results.

Greg Peel will return from holidays after Australia Day.

[Note: All paying members at FNArena are being reminded they can set an email alert specifically for The Overnight Report. Go to Portfolio and Alerts in the Cockpit and tick the box in front of The Overnight Report. You will receive an email alert every time a new Overnight Report has been published on the website.]

Click to view our Glossary of Financial Terms