The Overnight Report: Earnings Revival

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By Greg Peel

The Dow closed up 75 points or 0.4% while the S&P gained 0.6% to 2139 as the Nasdaq jumped 0.9%.

5400 Regained

After a choppy start yesterday, the ASX200 ultimately settled into a positive trend to take the index back over the 5400 level. Outside of macro influences, alpha moves were prominent as the AGM season hots up.

To that end we saw a solid update on annuity sales from Challenger ((CGF)) which helped the financials index to a 0.4% gain on the day. A jump in the iron ore price helped materials to a 0.5% gain while bargain hunting continued in the heavily sold off utilities sector, which rose 1.7%.

Ahead of the open yesterday, Philip Lowe made his maiden speech as RBA governor. The upshot is there is not going to be another rate cut if things continue to trend the way they are. But there could be another cut if inflation stays lower for longer, the labour market deteriorates and/or the housing bubble bursts.

The minutes of the September RBA meeting were also out yesterday but the governor rather gazumped those ahead of the release. When it comes to GDP, a big difference between assumptions for the September quarter and forecasts from three to six months ago is that further weakness in oil, iron ore and coal prices that were previously expected have given way to both oil and iron ore stabilising at better levels and coal going through the roof.

The GDP in focus today will be that of China. China’s September quarter result will be released mid-session along with monthly industrial production, retail sales and fixed asset investment numbers. Forecasts are for GDP to remain steady at 6.7%. As for the monthly data, they’ve been all over the shop lately so nothing would surprise.

Change of Heart

Net earnings growth for the S&P500 companies in the US has been negative for the past several quarters despite new highs being hit in the index, which just goes to show what impact central bank policy can have.

The trend has been for analysts to mark down their forecasts heading into result season, suggesting numbers in the order of a 6% decline, before results prove to be a bit better but still negative. This quarter was different in that analysts forecast only a 2% decline.

To date, and it’s still early in the season, results have again been better but this time analysts are now talking the possibility of an actual gain in earnings in the order of 2%. Moreover, while earnings have been disappointing over many quarters, revenues have been even more so, suggesting the only source of any earnings growth has been cost cutting.

This time, and again, it’s still early days, it looks like revenues might just beat as well.

Unfamiliar territory. Last night’s earnings winner was Goldman Sachs, which continued the trend of earnings beats from the banks but in very solid fashion. Among other Dow components, United Health was another big winner, offsetting a weak result from IBM. Johnson & Johnson posted a beat but has had a very solid run this year, hence its shares retreated.

It was those couple of drags that had the Dow only gaining 0.4% last night against the S&P’s 0.6%, while on the other side of the fence the 0.9% jump for the Nasdaq was all about Netflix, which held its 19% share price jump from Monday night’s aftermarket.

In this morning’s aftermarket results, Intel (Dow) has disappointed while Yahoo shares are up.

Outside of earnings, Wall Street’s attention last night was on US inflation.

The headline CPI jumped 0.3% in September to mark its biggest move in five months. It was all about the rebound in the oil price. The net fall in the oil price over a year means headline inflation is running at only 1.5%.

Core inflation, ex food & energy, rose only 0.1% in September but is running at 2.3% annual, above the Fed’s supposed 2% threshold. The Fed nevertheless prefers the PCE inflation measure which in August was still under 2%. There’s nothing in last night’s CPI numbers to prevent the Fed hiking in December.

Commodities

West Texas crude traded lower initially last night which meant a shaky start on Wall Street, but published weekly crude inventory forecasts had WTI turning around to be up US50c at US$50.40/bbl. The 50 level continues to be the inflection point ahead of next month’s OPEC meeting.

The spotlight is on coal and iron ore at the moment and while base metal prices have been jumping up and down a lot, they’re not really going anywhere. Prices were again mixed last night, with leading falling over 1% and nickel rising over 1% to mark the only moves over a percent.

Iron ore rose another US20c to US$58.00/t.

The US dollar index is steady at 97.89 but gold has risen US$7.40 to US$1262.00/oz.

The Aussie rose on the RBA governor’s suggestion of no further rate cuts and is up 0.5% at US$0.7662.

Today

The SPI Overnight closed up 13 points or 0.2%.

If the solid early trend in US earnings results continues it is a positive for the global economy. All eyes will today be on China, nevertheless, and the aforementioned GDP and monthly numbers.

BHP Billiton ((BHP)) will release its quarterly production report today while Ansell ((ANN)), Bellamy's ((BAL)) and Origin Energy ((ORG)) feature among several AGMs today.
 

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