The Monday Report

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By Greg Peel

Friday night marked the 25th anniversary of the Crash of '87. Does this date still carry an overwhelming psychological influence? The Dow responded with a 205 point, or 1.5% fall, the S&P lost 1.7% to 1433 and the Nasdaq dropped 2.2%. On the same day in 1987, the Dow fell about 500 points. To put that into context, the Dow would have need to fallen about 3500 points in 2012 to match the 23% drop on Black Monday.

The reality is Wall Street didn't need any further psychological influence beyond actual corporate earnings results. Google, which had fallen substantially on Thursday's earnings miss, fell further. Microsoft (Dow) posted a miss on Friday as sales of its Windows software declined, and it fell 3%. AMD, junior player to Intel in the chip department, announced a 15% staff reduction and fell 17%. Apple shares fell 3.6% in sympathy with a weak tech sector, and thus only served to exacerbate the index falls.

In the real world, McDonalds (Dow) posted slow sales growth and an earnings miss that sent its shares down 4.5%. Economic bellwether General Electric (Dow) reported a revenue miss across its diverse range of products, and it fell 3.4%.

The latter two results provide a warning that despite some early hope of overly pessimistic forecasts, the September quarter may have proven the worst for US earnings growth since 2008. Ahead of Friday, those S&P 500 stocks having reported so far had beaten forecasts in 60% of cases. After Friday, that ratio is in danger of slipping as the season rolls on. Last week was all about earnings misses in the tech sector, which may be considered isolated in the flux of transition from PCs and home computers to mobile devices and so forth and the impact that sudden leap is having. But when a hamburger seller and a manufacturer of everything from medical scanners to nuclear reactors posts a miss, you know the US economy is not in rude health.

Is Friday's session the portent of another correction? One can argue that a correction is due for Wall Street after a stellar run this year, which sees the S&P still up 14% to date. This is largely on global monetary policy measures and signs the US economy is trying to recover, particularly in the housing market. We must remember that when it comes to earnings results, the market's response is not about the absolute profit/loss, but about how it measures up to forecasts. Forecasts had fallen a long way ahead of the season, giving many confidence more “beats” could be posted than “misses”. Google shares, for example, may have fallen 9% on Thursday, but they had enjoyed a very sharp run-up to that point.

On the subject of housing, Friday's US existing home sales release disappointed with a 1.7% decline. However, sales occurring are being settled at higher prices, implying a slowing of turnover is price-related. Bold investors and hedge funds have been snapping up bargains in US housing for a while now, and eventually prices had to respond. If the first-mover “flippers” have now backed off, a fall in sales is to be expected, but is not reflective of a weak market.

For some reason there were those on Wall Street expecting the latest EU summit, which concluded on Friday, to produce a decision on a Spanish bail-out. The rest of us have resigned to Germany calling the tune and attempting to coordinate bail-outs for both Spain and Cyprus and ratification of Greece's next tranche into one package to be taken to the German parliament in one go rather than three. That will be next month. But when Francois Hollande emerged from the summit and declared that Spain wasn't even discussed, it became another source of weakness on Wall Street.

What was discussed were the plans for a coordinated EU banking system, the framework for which was agreed to be settled on by the end of 2013. Another typical European “when we get around to it” decision.

At the end of the day, Friday's was a session in which a lot of risk was suddenly taken off the table, and profits crystallised after a solid risk-on run to this point. If the earnings season does prove to be a net “miss” there are less negative expectations ahead, with QE3 in place, a Spanish bail-out expected before year-end and hopes for action from Beijing in the new year. The real issue will be the fiscal cliff, which is cited in surveys of US businesses as being the reason they will not hire or spend money given the fiscal policy uncertainty they face. Will politics kill the market with a policy stalemate again this year?

Responses in other markets on Friday were as one would expect for a risk-off session. The US dollar index rose 0.4% to 79.64 and the US ten-year bond yield fell 6bps to 1.77%. Gold dropped US$18.50 to US$1722.50/oz and the Aussie lost 0.4% to US$1.0324.

Base metal traders will all be back on board from tonight, but in a thin market on Friday, metal prices all fell 2-3%. The oils also saw 2% falls, with Brent down US$2.26 to US$110.16 and West Texas down US$1.96 to US$90.14/bbl. Iron ore lost US20c to US$115.30/t.

The SPI Overnight fell 45 points or 1.0%.

The US earnings season will roll on again this week, and there will be another raft of important US data releases. We'll see the Richmond Fed manufacturing index on Tuesday, new home sales and the FHFA house price index on Wednesday, pending home sales and durable goods on Thursday, and on Friday the first estimate of US September quarter GDP will be released. Early expectations are for 1.8% growth, up from 1.3% in June.

The Fed will also hold a policy meeting on Wednesday, but there's little expectation for anything new with QE3 now unleashed. Wednesday will also see a round of “flash” estimates for the September manufacturing PMIs of the US, the eurozone and China.

In an otherwise quiet economic week for Australia, Wednesday's September quarter CPI release will be the focus. In the past couple of quarters markets have held their breath for quarterly inflation numbers given the RBA's reluctance to make policy changes until the inflation trend is known. However, with Australian inflation now settled into the low end of the RBA's comfort zone, Wednesday's numbers are unlikely to influence what is likely to be, as far as most are concerned, a Cup Day cut.

The UK will also release a first estimate of third quarter GDP on Thursday, and on Wednesday Germany's influential IFO business sentiment survey is due. Thursday will also determine whether the RBNZ has the capacity to kick a field goal even if Dan Carter doesn't.

On the local stock front, this week and next are the busiest on the calendar for corporate AGMs. More resource sector quarterly production reports will be released over the course of the week and Wesfarmers ((WES)) will release its September quarter retail sales figures on Thursday. Thursday also sees a full-year result from ANZ Bank ((ANZ)), which will be interesting in the light of NAB's ((NAB)) profit warning late last week, and Macquarie Group ((MQP)) will try to find a silver lining in its interim result on Friday. Macquarie's performance will also likely be broadly reflected in AMP's ((AMP)) quarterly funds flow numbers on Friday.

Rudi will shortly be setting off for a month-long assignment in Singapore and the US and as such his media appearances will be on hold for the duration.

For further global economic release dates and local company events please refer to the FNArena Calendar.

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