Daily Market Reports | Jan 15 2014
By Greg Peel
The Dow rose 115 points or 0.7% while the S&P gained 1.1% to 1838 and the Nasdaq leapt up 1.9%.
Thump. Now we’re back to earth. The post-taper, Christmas/New Year euphoria has run its course and the hangover has set in. At least for those back in front of a screen. Those still on the beach – and there are many – may yet be the buyers. There was not a lot of volume as Bridge Street imploded yesterday in one of its snowballing sell-offs. Such sessions became familiar towards the end of last year, sometimes for more than one day, but eventually the market dusted itself off and resumed the grind higher.
Despite the background noise of taper doubt, the issue is one of PE. A typical bull market is one in which prices (P) start to rise in anticipation of earnings (E) improving in the ensuing period. The price/earnings ratio (PE) thus runs up towards the top of its historical range, or above, ahead of improving earnings, but then settles back towards the mean once those earnings materialise. For a market to continue to rally even as PEs consolidate, the E has to produce a solid uptrend.
And that’s what we’re now waiting find out. The current PE air is rarefied, but the US quarterly earnings season is now underway and the Australian interim earnings season will kick into gear around the second week of February. It will be a case of “show me the money”.
Which is what US banking giants JP Morgan (Dow) and Wells Fargo did last night. JP Morgan posted earnings of $1.30ps, down from $1.39 a year earlier, but inclusive of 27cps in legal costs relating to the bank’s various and much publicised indiscretions. Analysts expected $1.35 and JPM shares rallied 0.1%. Wells Fargo shares slipped 0.1% despite a $1.00ps result, up from 91cps, beating analyst expectations of 98cps. Wells managed to offset an easing in mortgage income, driven by lower demand in a higher interest rate environment, by sacking droves of mortgage division staff.
Bank results are very important to Wall Street this season given forecast earnings growth of 6% for the S&P 500 is made up of 22% for the financial sector and 3% for everyone else.
The real spark for Wall Street’s bounce last night was nevertheless the all-important December retail sales numbers. Sales increased by 0.2%, beating expectations of a 0.1% decline. Take out lumpy autos and sales rose 0.7%, beating 0.4% expectations. There was some concern that staples had more of an impact than discretionary, and that online stores are swamping brick & mortar, but after last week’s jobs report, Wall Street is looking for any confirmation the US economy is recovering sufficiently to justify the Fed’s tapering policy.
On that note, two FOMC voting members aired their views last night – the Philadelphia and Dallas Fed presidents. One said bond purchasing should be wound up by year-end and the other said the current taper should be doubled to US$20bn from US$10bn. Former chairman Ben Bernanke was also on the speaking circuit last night, and he said he’d like to see QE gone by year’s end.
This is the sort of talk that sent Wall Street spiralling on Monday night, but for some reason was shrugged off last night. Those sales figures, it would seem, really were that good.
In other news, industrial production in the eurozone rose by 1.8% in November, blowing everyone away. It was the fastest pace of growth in over three years. The release came on the back of individual member December quarter GDP results which have started to filter in, and Spain in particular has shocked with an actual increase. One minute Europe is heading back down the tubes again, and the next minute it’s not.
The reversal in US stocks last night meant just about everything else reversed as well. The US dollar index rose 0.2% to 80.63. The US ten-year bond yield rose 4bps to 2.87%. Gold fell US$10.40 to US$1242.50/oz and the Aussie dropped a cent to US$0.8962.
Aluminium copped it on the chin, falling 1%, but the other base metals all held their ground. Spot iron ore had a bad session, falling US$1.40 to US$129.50/t. The world has been waiting for the iron ore price to pull back given the world never expected it to push up to 140 in the first place. It doesn’t mean local iron ore stocks won’t be wobbly today, however.
It was a mixed night for the oils, with Brent down US19c to US$106.33/bbl and West Texas up US78c to US$92.58/bbl.
All is forgiven, the SPI Overnight closed up 30 points or 0.6%. Not quite the 80 points Bridge Street fell yesterday though.
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