The Overnight Report: Earnings Jitters

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By Greg Peel

The Dow closed down 68 points or 0.4% while the S&P lost 0.2% to 2114 and the Nasdaq dropped 0.7%.

Thumped

The extent to which the ASX200 plunged from the opening bell yesterday would appear to suggest those players who had retreated to the sidelines in the wake of the Greek resolution, wondering what to do next, decided that the slow drift back up to the 5700 mark over the week was unjustified. The big drop then fed on itself as investors panicked and got out fast.

No sector was spared in the rout, although the leading 3% drop for utilities suggests the market was expecting RBA governor Glenn Stevens to be more open to a further rate cut than he implied in his speech and Q&A in Sydney yesterday.

While reiterating that a decision to cut the cash rate once more remained “on the table”, Stevens rather poured cold water on the possibility in saying “It is not quite good enough simply to say that evidence of continuing softness should necessarily result in further cuts in rates, without considering the longer-term risks involved”.  Those risks include Australia’s surging property market.

There was certainly no impediment to another rate cut provided by yesterday’s inflation data. Australia’s headline CPI rose 0.7% in the June quarter, to an annual rate of 1.5%. Economists had forecast 0.8% for 1.7% annual. Core inflation, ex food & energy, which the RBA pays attention to, rose 0.55% for 2.3% annual to remain at the lower end of the RBA’s 2-3% comfort zone.

No doubt the sudden drop on Wall Street on Tuesday night, thanks to weak earnings reports from the likes of Dow components IBM and United Technologies, was enough to foster caution on Bridge Street yesterday. Wall Street is assuming a decent rebound in the US economy out of another snowbound March quarter and to that end, corporate earnings reports are expected to provide evidence. After the bell on Tuesday night Apple posted a disappointing result and fell 4% in the aftermarket. If Apple is struggling then the world is in trouble, it would seem.

Apple Pie

But on the strength of Apple’s numbers it was clear America’s biggest company is not struggling at all. It’s just that exuberant investors had pushed Apple shares up 13% in 2015 and were looking for an upside earnings surprise that was not forthcoming. Last night’s 4.2% correction is nothing to be particularly worried about.

Apple was not the only tech company to disappoint last night nevertheless. Dow component Mircrosoft also posted a weaker than expected earnings report which saw its shares fall 3.7%.

For the big US multinationals, the ever-rising greenback is a source of concern ahead of the Fed’s inevitable rate rise.

Last night the US dollar index ticked up 0.1% to 97.43. The US bond market continues to err on the side of caution, and is probably waiting to see what happens next in Greece before deciding it’s safe to sell once more. The Greek issue, as we must acknowledge, is not quite over just yet. The US ten-year yield fell 2 basis points last night to 2.32%.

Commodities

Energy stocks were also amongst those driving Wall Street lower last night, thanks to an unexpected rise in US weekly crude inventories. West Texas dropped US$1.64 in its new September delivery front month to US$49.22/bbl, representing the first sub-50 close since April. Brent, which is already trading on September delivery, fell US91c to US$56.00/bbl.

On the LME, the focus was on China. Yesterday a Chinese government ministry suggested China’s industrial sector still faces significant downward pressure and “arduous efforts” are needed to stabilize the economy. That was enough to send base metal prices lower once more, with only aluminium remaining relatively unscathed. Lead fell 1%, copper, nickel and zinc fell 2% and tin fell 3.6%.

Iron ore fell US$1.40 to US$50.70/t.

Gold slipped again, dropping US$7.10 to US$1094.00/oz.

The Aussie dollar is 0.6% lower at US$0.7382.

Today

Following the big adjustment on Bridge Street yesterday, the SPI Overnight is down 2 points.

CIMIC ((CIM)), or the old Leighton Holdings to you and I, will provide a curtain raiser to next month’s earnings season today as it releases its interim result. Fortescue Metals ((FMG)) will feature among those resource sector stocks releasing quarterly production reports today. Macquarie Group ((MQG)) will meet shareholders at the AGM.

Rudi will make his weekly appearance on Sky Business' Lunch Money, noon-12.45pm.
 

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