Tag Archives: Banks

article 3 months old

The Overnight Report: NY Fed Suing Bank Of America

By Greg Peel

The Dow closed down 165 points or 1.5% while the S&P lost 1.6% to 1165 and the Nasdaq dropped 1.8%.

It was a confluence of forces that met on Wall Street last night, culminating in the worst session since August 11. With traders having already pushed up indices close to their April peaks on potentially overblown expectations of QE2, the risk, as I have often noted recently, has been building up on the downside.

Yesterday the People's Bank of China lifted its one-year lending rate by 25 basis points to 5.56% and matched it with a similar deposit rate increase to 2.50%. While recent data emanating from China have been stronger than feared, heightening expectations of a further policy move from Beijing, the hike still came as a surprise being two days ahead of the release of China's monthly round of inflation and other data. Inflation concerns were cited as the reason for the hike.

It is a move which will only serve to intensify cross-border currency tensions given a floating currency would naturally respond to a central bank interest rate hike by appreciating. Not so in China's case, where any appreciation can only be minimal inside the range of peg against the US dollar. The question now, however, is to whether Beijing might be gearing up for at least some additional step of peg revaluation in its long, drawn out process.

As such, the interest rate move was enough to spark significant short-covering in US dollar positions. The US dollar index jumped a whopping 1.6% to 78.21. The euro had already been weak following the release of the influential ZEW investor sentiment survey which slid to a 21-month low.

The impact of the dollar bounce was immediate on Wall Street. The Dow opened down 150 points ahead of some major earnings reports. Bank of America beat expectations after adjusting for a goodwill write-off, Goldman Sachs posted a cracker, and Coca-Cola also beat The Street. By midday the Dow was only down 70-odd points.

But the sellers began to win again. Disappointing guidance from IBM (Dow) after the bell on Monday weighed on the tech sector which also impacted at the Nasdaq. Weaker than expected iPad sales had Apple shares tumbling after its very strong run-up of recent times. The indices were slipping again when at 2pm the bombshell was dropped.

A consortium of bondholders which includes investment giants Pimco and BlackRock along with the Federal Reserve of New York announced they were suing Bank of America for failing to repurchase or service dodgy mortgages within spurious CDOs issued pre-GFC. The mortgages in question were securitised by Coutrywide – the lender acquired by BofA with Fed approval around the time Bear Stearns was being rescued.

This is an issue that has actually been building for about six months and which had begun to have a noticeable impact on financial sector shares last week. The case involves the misrepresentation of the quality of mortgages and their proportions within certain CDOs, as I outlined in last week's Overnight Report The Ghosts Of Markets Past.

The expectation is that the case could end up costing BofA some US$47bn. Ironically, BofA itself is also the owner of some of these dodgy CDOs from its investment bank activities prior to its acquisition of Countrywide. It is also expected that this particular case is just the beginning of what may amount to some US$120bn of suits across the wider financial sector which will rope in other significant mortgage lenders such as JP Morgan Chase.

On the news, the Dow fell further to be down some 220 points towards the close. There it met some late buying which pushed it to be down 165 by the bell. Some commentators suggested that while this is yet another GFC fallout that needs to be worked through, such cases will take years in court before they are resolved and the banks will have ample time to earn and provision potential penalties.

Noticeably, the bank that had shorted CDOs in 2007 – Goldman Sachs – was the the only financial stock to finish higher on the day. Coke was the only Dow stock.

So just when we thought Wall Street had become frustratingly predictable along comes a session like last night's. Volume on the NYSE big board was heavy by recent standards at 1.27bn. Also driving stock indices lower was the wider impact of the significant dollar bounce. Material stocks were trashed.

Gold was thumped down US$40 or 3% to US$1333.50/oz while silver lost 4%, falling over a dollar to US$23.44/oz. The base metal spectrum consistently fell 3% in London.

Oil was thumped down US$3.83 or 4.6% to US$79.31/bbl.

And the parity-push appears to be off, at least for the moment. The Aussie was creamed by nearly two and a half cents down to US$0.9691.

The only market which didn't move significantly was the US bond market, where the overbought ten-years saw a fall in yield of only 4 basis points to 2.48%.

The SPI Overnight fell only 36 points or 0.8% compared to the S&P 500's 1.6% drop, but then the ASX 200 was lacklustre yesterday despite a solid Monday session on Wall Street. We got the Chinese news first.

After the bell on Wall Street, Yahoo posted a reasonable result and its shares are steady in the after-market.

The scene is set tonight for Morgan Stanley and Wells Fargo to report, along with eBay and Dow components Boeing and United Technologies. The Fed will also release its Beige Book, which will bring attention back to QE2 speculation.

On the local bourse, attention will fall on Ten Network ((TEN)) following the late night raid by James Packer's private investment company to net a 16% stake at $1.50. Ten shares closed yesterday at $1.41. Ironically, the move comes a day after Tabcorp's ((TAH)) demerger announcement which sparked speculation Packer may be keen on the CasinoCo spin-off. It had been assumed Packer was interested only in casinos now and no longer interested in FTA television. 

[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.]

article 3 months old

The Overnight Report: Banks Lead Wall Street Higher

By Greg Peel

The Dow rose 80 points or 0.7% while the S&P added 0.7% to 1184 and the Nasdaq gained 0.5%.

On last night's rally, the Dow Jones Industrial Average is now a mere 1.5% rally away from its April peak. The more relevant S&P 500 would require 3%. By contrast, on yesterday's close the ASX 200 is still 8% away from its April peak of 5025.

It is now widely accepted on Wall Street that QE2 is priced into the market, and maybe even a little too much so. As a modicum of doubt on the size of QE2 crept into the market on Friday, traders covered US dollar shorts and sent the Aussie running quickly away from parity. The greenback was higher still when US stock markets opened last night.

But it was all down hill from there.

September industrial production in the US came in with a fall of 0.2% when a rise of 0.2% was expected. While 5.4% up over twelve months, September's result represented the first IP contraction in six months. More evidence the US economy is quietly slowing.

Hence more evidence that QE2 is needed, and thus the US dollar fell from earlier highs to be down a touch on the day at 77.00. The Aussie, which had slipped as low as US$0.9850 in yesterday's local trade, marked a 0.3 of a cent gain since Friday night to US$0.9932. The US ten-year bond yield, which had rallied for a couple of days on QE2 doubts and a very weak thirty-year bond auction, fell 8 basis points to 2.49%.

The NAHB monthly measure of housing market sentiment was also released, and it showed a 3 point gain to 16 when a flat result was expected. While this represents a tiny bit of pick-up in activity, one must remember this is a 50-neutral index.

US stock will usually rise when the US dollar falls but it was the third quarter result from Citigroup which really provided the impetus. Citi posted US7cps earnings against US6cps expectation which was up from a loss of US27cps in the third quarter '09. Citi did, however, miss on the revenue line.

This was by no means a great “beat” on paper, but Wall Street loved it and sent Citi shares up 5.5%. The Street was no doubt pleased to hear that bad debts had appeared to have peaked in the quarter, but given the banks had been sold down heavily for three sessions in a row on foreclosure moratoria and CDO fraud allegations there were likely a few shorts being covered.

On the subject of foreclosures, Bank of America announced late in the session it would lift its moratorium and recommence foreclosures next week. This gave the banks another kicker to the close ahead of BofA's result tonight. BofA is a Dow stock and financials are the biggest cap-weight sector in the S&P 500. Citi got the boot from the Dow recently but is every day the most actively traded stock on the NYSE despite being about a quarter owned by Uncle Sam.

The earnings stories continued after the bell. Computer services giant IBM (Dow) handsomely beat on earnings and snuck over on revenue, but Wall Street was not all that thrilled with the company's pipeline of contracts, and having bought the stock up heavily in recent times has sold it down 3.6% in the after-market.

Then there's everyone's darling stock of the moment – Apple. Apple is now the second biggest stock in the US behind Exxon but it's not in the Dow (yet) so its impact is mostly felt on the Nasdaq. Unlike, say, a Citi which is trying to recover from disaster, Apple never really saw too much disaster from the GFC. Yet its earnings and revenue in the third quarter were up around 70% on last year. Earnings of US$4.64ps and revenue of US$20.3bn easily beat Wall Street's numbers of US$4.08 and US$18.9bn.

So Apple should be flying in the after-market, right? Wrong – once again, Apple shares have had a very strong run lately and at the end of the day while iPhone sales comfortably beat estimates, sales of the new iPad fell short. Apple shares are down 5%.

So there was likely a bit of “sell the fact” going on in the after-market which will make it tougher for Wall Street to mount an assault on the April highs tonight.

Oil, by contrast, has been weak of late so the slide in the dollar sent it up US$1.83 to US$83.08/bbl last night. Gold ticked up US$4.50 to US$1373.40/oz while base metals had a fairly strong session in London, rising 1-2%.

The SPI Overnight gained 41 points or 0.9%.

Today in Australia we will see the minutes from the October RBA meeting and economists will be looking carefully for more clues as to whether we should expect a Cup Day rate rise. OZ Minerals ((OZL)) will release its quarterly production report.

Tonight in the US sees results from BofA and Goldman Sachs along with Dow components J&J and Coke and Google's poor cousin Yahoo. The Bank of Canada makes a rate decision tonight which may impact on the US dollar.

[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.]

article 3 months old

Infrastructure Spending Requirements Rising In Australia and Asia

By Chris Shaw

According to ANZ Banking Group senior economist Shane Lee, Australia needs to spend around $600 billion over the next six years to bring its infrastructure up to an acceptable standard. The need for such spending reflects insufficient and at times poorly directed government investment over the past 40 years in Lee's view.

What will make achieving this target more difficult according to Lee will be a lack of skilled labour in the engineering and construction sectors, as this will hinder government action despite balance sheets being in relatively good shape and capital markets functioning well.

As an example of what is occurring in Australia, Lee points out Australia's mineral wealth and the uplift in commodity demand from Asia is seeing the Australian mining sector invest heavily. But this investment is pressuring the capacity of both rail and port infrastructure, with the coal sector a prime example of this trend.

Breaking down where the money needs to be invested, Lee suggests around 1% of Australian GDP annually needs to be invested in the road network, while for electricity the requirement stands at around 0.8% of GDP annually for the next few years and around 0.5% longer-term.

Telecommunications has a similar requirement of around 0.5% of GDP long-term, though the National Broadband Network (NBN) will see this level exceeded for the next few years according to Lee. Rail also needs higher short-term spending at around 0.3% to 0.4% of GDP, before settling at around 0.2% of GDP on Lee's numbers.

If Australia was to invest $600 billion in infrastructure over the next six years this would equate to around 8% of GDP over the period, something Lee suggests will be a major challenge to both State and Federal government balance sheets.

But fortunately the Federal Government at least has its finances in relatively good order, Lee noting debt is currently only around 6% of GDP. This gives the capacity to fund such investment requirements. State Governments, with the possible exceptions of Western Australia and the Northern Territory, are also reasonably well placed to provide funding for projects in Lee's view.

As well, Lee sees other sources of finance playing a growing role in infrastructure markets, with both the private sector and unlisted equity expected to become increasingly important sources of funds in the future.

Given difficulties in assessing just how much spending is being planned on infrastructure projects ANZ has developed a database of major projects, as these large projects typically account for around 50% of total construction work done.

Using such a model Lee suggests the outlook for investment in road infrastructure in Australia shows a fall in spending to A$3.5 billion in 2013 before a rise to $5.2 billion in 2015. This rise implies some underlying strength to the current cycle in Lee's view.

In electricity the pipeline of projects has dipped markedly from expectations of a few years ago, something Lee sees as a concern given recent industry projections of insufficient longer-term electricity generation capacity.

Spending on water infrastructure also appears to be trending down after strong investment in both 2007 and 2008, while Lee notes in rail the planned level of spending in Australia continues to rise. This is thanks to both mining and energy related projects and track upgrades to passenger networks and light rail projects in a number of states.

Telecommunications spending is expected to strengthen significantly in coming years thanks to the NBN, though Lee suggests there is some risk to this expectation given opposition to the project and the narrow majority enjoyed by the current Federal Government.

Looking internationally, Lee estimates governments in Asia will need to invest around US$13 trillion in infrastructure over the next 10 years, but this reflects a different challenge to the one in Australia. In Asia it is rapid urbanisation and not poor decisions or insufficient previous investment that means spending such sums is now required. The United Nations is forecasting Asia's urban population will increase to more than 3.0 billion over the next 40 years, up from an estimated 1.4 billion this year.

What will assist this spending in Asia is the fact public finances are generally solid, though Lee suggests project finance and planning within government needs some streamlining. Expectations with respect to the level or urbanisation in Asian economies suggests India and China will have the largest infrastructure burdens, while Lee expects the likes of Indonesia, Pakistan and Bangladesh will also need invest heavily in infrastructure as a proportion of their economy.

This is important, as in Asia especially good quality infrastructure can provide economic benefits by lowering the cost of trade with other nations. Lee points out the Asian Development Bank estimates a reduction in the cost of trade by 25% thanks to improved infrastructure would add 0.8% to Chinese GDP. This equates to around US$13 billion.

For investors Lee notes there are a number of Australian companies offering exposure to the infrastructure sector. As examples, service companies operating in the sector include Leighton Holdings ((LEI)), Cardno ((CDD)), Coffey International ((COF)), United Group ((UGL)), Transfield Services ((TSE)), Downer EDI ((DOW)) and Asciano ((AIO)). Other service companies include WorleyParsons ((WOR)), Spark Infrastructure ((SKI)), SP Ausnet ((SPN)), Connect East ((CEU)) and Transurban Group ((TCL)).

Companies that supply materials to infrastructure projects include Boral ((BLD)), Adelaide Brighton ((ABC)), Crane Group ((CRG)) and OneSteel ((OST)). Companies that finance infrastructure projects include Macquarie Group ((MQG)), the big four Banks in ANZ ((ANZ)), Commonwealth Bank ((CBA)), National Australia Bank ((NAB)) and Westpac ((WBC)), along with Hastings Diversified Utilities Fund ((HDF)), Hastings High Yield Fund ((HHY)) and Challenger Infrastructure Group ((CIF)). 

article 3 months old

Bank Reporting Season – A Preview

By Greg Peel

While Commonwealth Bank ((CBA)) reports on a regular June year-end cycle, the other Big Four banks report on a September year-end. They will thus begin to report their full-year earnings next week. National Bank ((NAB)) is due on October 27, ANZ Bank ((ANZ)) on October 28, and Westpac ((WBC)) on November 3.

Macquarie Group ((MQG)) reports on a March year-end and as such will report its first-half result on October 29.

Having had a solid run in the September rally, the Big Four banks have underperformed the index more recently, falling short of the ASX 200 by around 3% in October. Year-to-date up to last week, note the analysts at Macquarie, the banks have underperformed the ASX 200 by over 8%. Over the course of the year, ANZ shares have fallen 3%, CBA 8%, Westpac 15% and NAB 19%.

Such underperformance should come as no surprise given the influence of resource sector stocks within the index. While they are enjoying a boom, their success is not translating into the wider Australian economy on the same scale. Banks do not lend much in the way of funding to miners but are otherwise exposed to households, small to large businesses and institutions. The return of the RBA cash rate to a “normal” level has impacted on everyone bar the resource sector more or less, and the prospect of further increases is daunting for mortgage holders and struggling small businesses.

The overriding story in the banking sector at present is one of funding. The cost of offshore borrowing is rising on a net basis given 5-year loan rollovers are moving into post-GFC pricing from pre-GFC pricing, competition for deposits is making it tough to pick up valuable margin points, and the securitisation market has only just begun to show the first, timid signs of re-emerging. But we will never see a return to the glory days of securitisation markets as they were pre-GFC.

In the meantime, banks have proven reluctant to raise their standard variable rates on mortgages although they are no doubt busting to do so. One can only assume they are waiting for the RBA to raise again so they can add on a few more basis points to SVRs and other loans rather than risking public ire over completely independent increases. But even on the assumption loan rates will increase over FY11 (end-September) bank analysts are forecasting quietly decreasing net interest margins as such increases fail to overcome the increased cost of funding.

The banks are also now facing another problem in a soaring Aussie dollar. They are immune to currency for the most part in their day to day local activities, but a strong AUD/USD means having to increase funding levels to match the same value of Aussie dollar equivalent. Fortunately the Aussie's rise against other currencies (eg Europe) is not as pronounced and so only US funding is a problem.

Goldman Sachs estimates an added cost of funding to the banks of $2-3 billion in FY11 based on the broker's currency target of US$1.05 by next September. However, in the context of some $120-140bn funding requirement over the period, the impact is not sufficient to overly impact valuations.

There was good news recently for the banks on the long awaited release of the Basel III global banking regulations. Requirements regarding capital and liquidity were a lot less onerous than feared and all of the big Australian banks' current levels are well above limits. This does not necessarily mean however, as the Macquarie analysts suggest, that the banks will quickly deploy their excess capital and run balance sheets close to the wind in Basel III terms. They are more likely to stick with comfortable safety margins in Macquarie's view.

Australian banks may have found themselves comfortably inside regulatory limits following their capital raising and dividend cutting spree of 2009, but that is not the case for all banks across the globe. In order to satisfy 7% tier one capital limits, Macquarie is expecting upcoming “significant” capital raisings from banks in Europe, Japan, China and Malaysia and from a handful of large US banks.

With all that fresh capital on offer across the globe, offshore investors are unlikely to be as focused on Australian banks. “Historical precedence suggests,” says Macquarie, “bank share prices underperform during capital overhangs”.

While the Australian banks were busy raising capital as a result of the GFC, they were also busy retaining earnings in provision accounts against the threat of bad debts, and even more earnings into simple “uncertainty” contingencies. With Australia having escaped the GFC relatively unscathed, those provisions are quietly being brought back to the bottom line following the apparent peak in bad debt growth.

This is a plus for the banks to offset some of the lost margins due to higher funding costs, albeit not everyone is completely out of the woods just yet. The banks have also to date elected to keep their “uncertainty” provisions intact in case of, for example, a European sovereign debt default or some other as yet unknown catastrophe that may once again send global credit spreads soaring.

The balance of bad debt provision reductions and net interest margin movements will be the focus of attention in this upcoming earnings season. JP Morgan, for example, is forecasting “modestly” lower margins for NAB since the previous quarterly trading update, “significantly” lower margins for Westpac, and “modestly” higher margins for ANZ.

ANZ is enjoying the benefit of having used the excess capital it raised to increase its banking exposure in Asia. While the other three, and small and regional lenders, have been fighting a deposit “war” to their detriment. ANZ has been able to bring in fresh deposits from Asian customers. ANZ is also currently in the process of conducting due diligence on the potential acquisition of the 57% stake on offer in Korea Exchange Bank.

NAB is more highly weighted to business banking than the others which has proven handy while SVRs have remained tight. Big mortgage lenders Westpac and CBA are hurting the most, which puts their respective GFC acquisitions of St George and BankWest into perspective. The two biggest banks also took the biggest slice of the mortgage spree on offer in 2009 via the government stimulus package.

As we look to the potential of further rate rises from the RBA, we reflect upon the number of mortgages written at a time when mortgage rates were at a historical low, and the government was effectively funding mortgage deposits. While Australia's unemployment rate is comfortably low, and house prices at best stable at present, it is still a matter of concern as to how many stimulus-driven home buyers bought on the basis they would not have otherwise been able to afford a mortgage but for the “emergency” pricing environment. Further RBA rate hikes, and additional independent rate increases from the banks, will squeeze many buyers at a time when Australia's housing market is looking “bubbly” on a globally comparative basis.

For NAB, there is also the problem of its exposure to banking in the UK. NAB would dearly have loved to have exited its UK positions by now but this is not an environment in which UK banks are highly sought after – quite the opposite. So NAB is stuck with its exposure, and it will be interesting to judge the impact of strict UK austerity measures.

NAB also has only minimal provisioning against the “toxic” assets which are still sitting on its balance sheet, although those assets may yet reach maturity without drama.

For Westpac it's all about mortgages, and the rising cost of the offshore funding needed to cover those mortgages. Westpac management estimates that the bank's cost of funding will not peak until FY12. And still Westpac sits waiting, waiting, waiting for an opportunity to raise its SVR. In a sense, it's a bit off a stand-off not just between each of the banks but between the banks and the RBA.

The RBA knows the banks will have to raise their loan rates sooner rather than later, and such increases effectively implement policy for the central bank. Might the RBA be prepared to sit tight again on November for that reason? And the strong Aussie is also working as a policy assistant to the RBA as it affects a slowing of GDP and inflation growth.

If the Fed finally does come in with a large dose of QE2, and the Aussie continues on its rising path, might the RBA even consider a rate cut? That would be a welcome gift for the banks given they could leave their loan rates largely as is and finally pick up some margin relief. But with economists convinced the commodity boom will drive the RBA cash rate up perhaps a total of 100 basis points by end-2011, it's difficult to see any rate cut ahead.

Of the eight brokers in the FNArena database and the four Big Banks, there is only one Sell rating at present. JP Morgan is Underweight in NAB. NAB nevertheless attracts three Buy ratings so is second in the (average) pecking order behind preferred bank ANZ (six Buys) and ahead of CBA (one Buy). All eight brokers consider Westpac to be no better or worse than a Hold prospect.

Despite the spread of ratings, it is interesting to note the upside to average target price for each of the banks is a very consistent 9-11% (based on yesterday' closing prices).

Macquarie Group has already warned that it faces ongoing profit downgrades if activity in financial market trading and M&A activity continues to be tepid. Without the earnings capacity of its once booming infrastructure fund business, Macquarie is now highly reliant on broking and advisory fees and proprietary trading profits to drive earnings.

In short, there is little to suggest the last quarter has been any much better on that front than the previous quarter, so the market has been gearing up for a weak first half result from Macquarie. Macquarie Group shares are down 38% from their twelve-month peak.

As is always the case for Macquarie, the final profit result will be very much dependent on the proportion of profits kept over for staff bonuses. The Group may decide to keep that proportion at the low end (~45%) this year to offset weak revenues but in so doing it would risk encouraging a further staff exodus from what was once the “Millionaires Factory” as is already the case.

Note: For a wider discussion on the current issues facing Australian banks please see Australian Banks: The Battle At The Margin.

article 3 months old

The Monday Report

By Greg Peel

It was an unusual session on Wall Street on Friday night given the Dow fell 31 points or 0.3% while the S&P rose 0.2% to 1176 and the Nasdaq soared 1.4%. It was a tale of two earnings reports. A strong result from Google sent its shares up 11% while a revenue miss from General Electric (Dow) saw its shares fall 5%. Ongoing concerns over mortgage foreclosures and fraud claims had the banks down yet again, impacting on both the Dow and S&P.

The highlight of the session was, perhaps, that for one brief moment the Aussie dollar traded above US$1.00 when the greenback opened weaker. But if you blinked you would have missed it, and the Aussie quickly retreated to be just above US$0.99 again by the close. Driving the retreat was a rebound in the US dollar.

The US dollar closed up 0.6% to 76.96 in the session as doubts began to creep in over QE2. The doubts are not about “if” but about “how much” given the significant level of QE2 already priced into the market.

In a speech on Friday, US Fed chairman Ben Bernanke said, “There would appear – all else being equal – to be a case for further action”. This provided confirmation the Fed was indeed planning some further quantitative easing but when Bernanke suggested officials “will take account of the potential costs and risks”, and that any action would be “contingent on incoming information about the economic outlook and financial conditions,” Wall Street began to wonder whether assumptions of a US$500bn package might be just a little too presumptuous. The “costs and risks” part seemed to be a nod to those officials within the Fed ranks – both in and out of the FOMC – who have voiced their doubts and fears with regard to QE2. Perhaps consensus is still proving difficult.

The US bond market also responded to Bernanke's comments, with the ten-year yield rising 6 basis points to 2.56%.

With regard to the “incoming information” upon which QE2 will be dependent, the release of the September CPI on Friday showed a headline increase of only 0.1% and a core change of zero. Core CPI is up just 0.8% annualised and is quietly slowing. Bernanke has singled out inflation as his target and has noted the Fed is mandated to keep core inflation running at 1.5-2.0%. This release alone is enough to suggest at least some level of QE2 is a given.

In other releases on Friday, the Michigan Uni consumer confidence level slipped in the first October survey while manufacturing activity in New York State was better than expected in September. August business inventories rose more than expected but sales did not grow to match.

The stronger US dollar sent gold down US$11.70 to US$1368.90/oz while oil fell US$1.44 to US$81.25/bbl and base metals saw 1-2% drops. Copper was nevertheless resilient, rising slightly.

The SPI Overnight lost 16 points or 0.3%.

Bernanke's comments are likely to reinforce the notion, between now and the November FOMC meeting, that bad news is good news and vice versa. Positive economic data releases will be seen as a possible dilution to QE2.

This week begins with US industrial production tonight along with the housing market sentiment index and Treasury long-term capital flows. Tuesday it's housing starts and building permits and Wednesday sees the Fed's monthly Beige Book which will provide evidence of how each of the Fed regions' economies is performing. On Thursday the Conference Board releases its leading economic index and the Philadelphia Fed its manufacturing index.

In Australia the general populace will continue to barrack for the Aussie Battler to conquer parity but exporters will be happy if QE2 doubts can send it back the other way. On Monday it's vehicle sales and on Tuesday the RBA will release the minutes of its October meeting. Economists will be looking closely for clues that Melbourne Cup day will see a rate rise. Maybe that might be the parity call.

Wednesday brings merchandise imports, Thursday housing affordability in the third quarter and Friday the import and export price indices.

Thursday sees the monthly round of Chinese data, including CPI, PPI, retail sales and industrial production. Thursday also brings the release of China's September quarter GDP. As is the case with US data, Chinese data have become a two-edged sword in that a better than expected result would bring expectations of further policy tightening from Beijing.

While Australia might be worried about its overly strong currency, the same is true in Europe where the euro is back to pre-crisis levels given the weakness of the greenback. Next week sees the two important ZEW and Ifo business surveys in Europe which have the power to move the markets.

On the stock front, Bank of America (Dow) and Goldman Sachs will report their third quarter earnings in the US on Tuesday along with Coca-Cola (Dow), Johnson & Johnson (Dow) and Yahoo. Wednesday it's Morgan Stanley, Wells Fargo, Boeing (Dow), United Technologies (Dow) and eBay.

Thursday brings Amazon, American Express (Dow), AT&T (Dow), Caterpillar (Dow), Credit Suisse, McDonald's (Dow), Travelers (Dow) and UPS, while Friday sees Verizon (Dow) to round out some of the highlights for the week.

On the local stock front, momentum continues to build in the AGM season while the Ten Network ((TEN)) reports its full-year result on Thursday. There will also be quarterly production reports from OZ Minerals ((OZL)), BHP Billiton ((BHP)), Newcrest ((NCM)), Santos ((STO)), Iluka ((ILU)) and Woodside ((WPL)) across the week.

Foster's ((FGL)) will update on its beer business on Thursday and wine business on Friday.

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

article 3 months old

They’re A Bit Ambitious in Queensland

By Greg Peel

It's tough being a small fish in a big pond, even if the states of Queensland and Western Australia to which you are most exposed boast all the underground goodies. And those states aren't without their debt problems.

Bank of Queensland ((BOQ)) yesterday surprised analysts by announcing in its FY10 result that its bad and doubtful debt levels had actually increased. Every other bank reporting to date has declared better than expected drops in BDDs.

It was also a surprise to most that BOQ's net interest margin – that simple bank metric of loan interest minus funding cost – had fallen a substantial 10 basis points in the period. This was largely a reflection that BOQ has had to fight, and fight hard, to attract deposits. The Big Banks may be crying poor on increased funding costs but for the tiddlers, offshore funding costs are even more expensive given greater risk. And while there are tentative signs the loan securitisation market is attempting to be Phoenix-like, it's a long way back to a reliable source of cheap funding, if ever.

BOQ could, nevertheless, solve a lot of its problems in one fell swoop if it just put up its standard variable mortgage rate independently of any RBA cash rate hike, but then it can't risk losing any more market share to the big boys. It is now considered inevitable by the market that the Big Four will have to make ex-RBA SVR hikes but the staring competition just seems to go on and on. It looks like they are waiting to move under cover of an RBA hike (ie add an extra 15bps or so to the RBA's 25bps) and so perhaps November will be the month.

BOQ has a greater leverage to an SVR hike than others.

It is also BOQ's ambition to take the bank's return on equity level to 15%. Given it achieved only 7.9% ROE in FY10, this seems like a lofty goal. Indeed, management has shifted the timing of this target out to FY12 now, instead of FY11, but analysts suggest FY13 might be more realistic, if at all.

On the plus-side BOQ is set for a big ROE boost from its recent CIT and St Andrew's acquisitions which are yet to make an impact in the accounts. BOQ needs asset growth if it is going to hit the magic 15%. But asset growth is one side of the equation – the cost of it is the other. Realistically, BOQ will not get to 15%, analysts argue, if it doesn't eventually see a lower funding cost along with a higher SVR. And that's a big ask in the time frame.

Moreover at 7.25%, BOQ's tier one capital ratio is only a snip above the new Basel III requirements, meaning that further acquisitions (which management is targeting) will likely mean a capital raising or two. This would dilute earnings per share and ROE. And all the while BOQ needs to get those BDDs under control or provisions will also soak up earnings.

It's always a good idea for everyone to have a goal in life, even if there might be some pie in the sky. But the question is as to whether it really matters whether BOQ actually gets to a 15% ROE as hoped, or not. And the answer to that question lies in whether the market is currently pricing BOQ for success.

It isn't.

Credit Suisse is one broker among those pointing out BOQ trades on only a 1.0x book value and a forward PE of 9.7x. By comparison, regional compatriot Bendigo & Adelaide ((BEN)) is trading on a 10.1x PE. Historically, BOQ trades at a 2% premium to BEN but is currently at a 4% discount, and is also at a full 12% discount to the biggies.

It is on that basis that only one FNArena database broker has a Sell on BOQ. BA-Merrill Lynch is largely alone in suggesting BOQ's current PE suggests full pricing.

The other seven all agree the ROE goal is a bit steep, if not totally at least in the timing. But the four Hold raters balance this against what they believe is a sufficient valuation discount, and the three Buy raters are also putting faith in both the impressive BOQ management team and the upside potential offered by the resource states of Queensland and WA.

Uncertainties surrounding bad debts, funding costs, rate rises and credit demand have seen broker bank valuations grow in volatility post GFC. The spread should be relatively tight compared to, say, a risky mining stock, but for BOQ the FNArena database target prices range from $10.30 (Merrills – Underperform) to $14.04 (JP Morgan – Overweight).

The resulting consensus target is $11.91 and BOQ shares are trading around $10.50 today.

article 3 months old

Next Week At A Glance

By Greg Peel

Enough said about QE2. Wall Street, by estimation, has factored in US$500bn of fresh QE beginning in November either as one announced lump or in tranches. This has driven stock markets higher in September and into October.

One can only assume confirmation would provide limited upside therefore, and maybe even a bout of “sell the fact”, while disappointment would bring an exodus. However, in the interim there is the small matter of the US third quarter earnings season. Expectations appear to be improving as we enter the season and with a likely QE2 safety net in place, there is still further room for stock market upside if bullish expectations prove accurate.

Tonight in the US it's the turn of General Electric (Dow) to report, and with a finger in many pies GE is seen as a general economic bellwether. Next week will feature big banks, with Bank of America (Dow) and Citigroup reporting along with Dow components Amex, Coke and Boeing. Financials are the most substantial sector in the S&P 500.

Tonight in the US also sees retail sales and the all important CPI – all important now that the Fed is targeting inflation with QE2. Business inventories, the Empire index and UMich index round out the session.

Next week begins in the US with industrial production and the housing market sentiment index while throughout the week we'll see housing starts, the Fed Beige Book, the Philly index and leading economic indicators.

All eyes will turn to China next Thursday as not only will the monthly round of data be released – CPI, PPI, retail sales, industrial production – but the September quarter GDP will also be revealed. Yes – it takes Beijing only three weeks to calculate what everyone else takes three months to calculate which is why the world assumes the results are set to a target.

In Australia, the minutes of the October RBA meeting will be released next week and economists will scour for clues on a November rate rise. Thereafter Westpac will publish its leading economic index and CBA will offer third quarter housing affordability.

On the stock front, we'll be into about the second busiest week of AGMs (just wait for the following week) and amidst the melee more resource sector production reports will be released, including those of OZ ((OZL)), BHP ((BHP)) and Woodside ((WPL)). The Masterchef Network ((TEN)) will report its full-year result.

On Tuesday night the Bank of Canada will make a rate decision and a hike is on the cards given the Loonie has regained parity with the greenback. More downward pressure on the greenback will provide more impetus for Aussie parity if we're not already there by then.

For a more comprehensive preview of next week's events, please refer to "The Monday Report", published each Monday morning. For all economic data release dates, ex-div dates and times and other relevant information, please refer to the FNArena Calendar.

article 3 months old

The Overnight Report: The Ghosts Of Markets Past

By Greg Peel

The Dow fell one point while the S&P fell 0.4% to 1173 and the Nasdaq lost 0.2%.

It is now a matter of history that when the demand for AAA-rated subprime CDOs revved up in the period 2005-07 there were not enough mortgages available. The most disturbing aspect is that when a small few cottoned on to the potential disaster that may lay ahead and began buying CDSs on the CDOs (ie going short subprime), investment banks did whatever they could to create new CDOs to set against CDS demand.

So was born the NINJA mortgage – no income, no job or assets. Mortgage brokers were fraudulently filling in applications for dumbstruck home buyers which included fictitious employment that was never verified. It was a house of cards that had to eventually crumble, and so it did, but it is now coming to light there was another (allegedly) fraudulent step in the whole CDO creation process.

A CDO was made up of three tranches of mortgages – prime, medium-prime and subprime. A typical CDO may be proportioned at 80%, 15% and 5% respectively. Despite the fact default of the 5% proved enough to bring down the 100% in many cases under the CDO structure, it is alleged the banks that were pooling those mortgages for assembly into a CDO were misrepresenting those proportions. In other words, the CDO you just bought may have contained fewer prime mortgages and more subprime mortgages than represented. Clearly that CDO then becomes a lot more risky.

Given most CDOs had maturities of 5 years, plenty of them still actually exist despite being written down to zero by all and sundry. Savvy investors have been quietly buying up this “junk” for mere pennies in the dollar and amassing sizable pools. The intention here is clearly not one of simply hoping the CDOs actually come good – the intention is to sue the creators of the CDOs for fraud. And that includes all of the big banks, and particularly those like BofA and Citi which bought up distressed mortgage lenders after the subprime crisis had hit to add to their own portfolios.

That's why US bank stocks were being slapped about 5% last night. It's not enough that they're already having to deal with imposing moratoria on mortgage foreclosures, because it seems some homes may have been foreclosed on erroneously.

Weekly new jobless claims were also out last night, and they jumped 13,000 when a rise of 1,000 was expected. That's okay – more fuel for QE2. The September producer price index rose 0.4% at the headline due to higher food costs but only 0.1% at the core, which is not enough for the Fed to change its mind.

The August US trade balance blew out 8.8% over July to US$46bn. The Chinese September trade balance released earlier this week showed a reduction in surplus, which eased some of the pressure on Beijing to revalue, but this result, in which the specific US deficit with China blew out from US$25.9bn to US$28bn, will only be another call to grab the torches and pitchforks and meet in the town square.

Perhaps the biggest surprise last night, however, came from the Treasury auction of US$13bn of thirty-year bonds. Demand was quite simply woeful. Just prior to the auction at 1pm, the thirty-year was yielding 3.82%. But when the auction settled at 3.85% there was a selling scramble which saw the yield close the day at 3.92%. Foreign buyers bought only 32% compared to a 37% running average. In sympathy, the ten-year yield jumped seven basis points to 2.51% and is looking increasingly nervous.

In recent months, the spread between the US ten-year and thirty-year maturities has blown out to greater and greater records. That's because the Fed allowed the mortgage (30yr) securities in its portfolio to mature and replaced them with 2-10yrs. If QE2 does eventuate, it will also be concentrated in the 2-10 range. So as that day approaches, it appears bond traders are deciding that this particular rubber band has also stretched too far. Time to get out in case things don't quite go the way they're expected to.

And the US dollar tanked last night, down 0.7% on its index to 76.53. Despite secular weakness, last night's fall was assisted by a “tightening” of monetary policy in Singapore, affected by the Singapore central bank expanding the range of it's peg against the US dollar – a revaluation by any other name. We always point to the Chinese miracle, but Singapore is also booming.

The euro finally reconquered US$1.40 last night – its pre-crisis level. The Canadian dollar reached parity for the first time in six months. And with the US dollar index down 0.7%, one might have expected the Little Aussie Battler might also be waving the parity flag. Not so.

The Aussie is up 0.3 of a cent over 24 hours to US$0.9937. In yesterday's local trade, the forex cowboys gave parity a red hot go, no doubt attempting to trigger stop-loss orders that might be foolishly set at the magic number (word of advice – if you're going to set a stop never set it at a significant number). But like a small child climbing a large tree, the Aussie took a lot at the top and suffered a bit of vertigo. It thus climbed back down a few branches, now breathing deeply and steeling itself for the final assault. Anxiety is heightened by the fact the tree-top is actually in the clouds – no one knows what lies beyond.

Funnily enough, on Wednesday night the US dollar index fell only slightly and gold rallied US$20, while last night the dollar fell significantly and gold managed only a US$8.20 gain to US$1380.60/oz. More vertigo? I'd wager the sellers are ready in ambush in that cloud above US$1400.

And wobbles as well in commodities? Oil was down US19c to US$82.82/bbl while base metals also ticked slightly lower.

The SPI Overnight lost 10 points or 0.2%.

After the NYSE bell, Google reported Q3 earnings of US$7.64ps against expectations of US$6.69ps on revenue of US$5.48bn versus US$5.27bn. Google shares are up 9% in the after-market and the scene is thus set for another strong session on Wall Street tonight.

Aside from the forex cowboys in action, yesterday's push in the Aussie was assisted by a flood of risk-taking money sweeping in across Bondi Beach and straight down to Bridge Street as foreigners sought Aussie big-caps after the strong session on Wall Street. Just don't tell them that an Aussie above parity is bad news for commodity exports and pushes up the funding cost for banks.

It's General Electric night tonight in the US.

[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.]

article 3 months old

The Overnight Report: It Just Wants To Go Up

By Greg Peel

The Dow closed up 75 points or 0.7% while the S&P added 0.7% to 1178 and the Nasdaq rose 1.0%.

The Dow was up as much as 135 points mid-session before reasonable selling hit towards the close. Nevertheless, Wall Street rallied and rallied strongly and it's actually rather difficult to pinpoint exactly why. Perhaps the clue lies in last night's volume which, at over 1.2bn on the NYSE big board is about 40% more than the recent average. Perhaps it was not just the traders playing last night. Perhaps there was some real buying following an 11% bounce from the previous low.

Reading the wire reports one gets the impression there were three main drivers last night – China, US earnings and the Fed.

Yesterday, China released its September trade balance which was up on August to a level which represented records in both exports and imports. On face value, it was a great result for everyone in and outside China. Yet for some it was a disappointment.

Despite record numbers, China's monthly trade surplus fell to US$16.9bn from US$20.0bn in August. Economists had expected US$17.5bn. Exports rose 25.1% (year-on-year) when 26% was expected, and imports rose 24.1% when 25% was expected. It all comes down whether you can find anything really disappointing in numbers of 25% and 24% growth. You might if you compare to August, in which exports rose 34.4% and imports 35.2%.

So the pace of Chinese trade growth slowed quite substantially in September, but still only slowed to levels that anyone else would be thrilled with. Beijing is trying to slow things down. And there is good news for the US in that a lower surplus is a step in the right direction. The US wants to export more to China and wants China to export less to the US, given the artificial currency.

Or you could say it's not good news for the US because it weakens Washington's argument for swift and decisive revaluation of the renminbi.

So take the numbers as you will. One thing's for certain – they didn't fire up the Australian market yesterday, but then the Australian market is trying to come to terms with its own currency problems.

Earnings reports were another reason given for last night's rally on Wall Street. After the bell yesterday Intel (Dow) beat the Street on both earnings and revenue. Last night JP Morgan (Dow) reported a 23% increase in September quarter profit over last year featuring falling mortgage and credit card delinquencies and a lower cost of funds. At US$1.01cps, JPM's earnings beat the Street's estimate of US90cps, and were up on last year's US80cps.

Yet revenue came in at US$23.8bn against an expectation of US$24.3bn and compared to last year's US$26.6bn. So the result wasn't so pleasing after all. Indeed, JPM shares fell 1.4% in the session and Intel shares fell 2.7%. Not sure where the positive impetus is there.

But there's always the Fed of course, although last night didn't actually bring any “new news”. It is not unusual for Wall Street to spend time absorbing Fed statements and minutes before responding given there is otherwise only a two-hour window on the day of release. So the rally last night was still being attributed to what has been seen as further confirmation from the Fed that QE2 will begin in November.

One interesting point to recall re the Fed is that this time, as opposed to QE1, the Fed has flagged that it may not announce one full QE package to be implemented over time (QE1 was US$1.7trn over 6-9 months) but instead announce smaller skirmishes in a short time frame which can then be assessed and another round considered. So for example, while Wall Street is pricing in US$500bn of QE2, the Fed might start by announcing only US$100bn as a first foray. Would Wall Street be happy with a US$100bn announcement?

So again I suggest that explaining last night's rally is not quite so cut and dried. Therefore I think it might be reasonable to assume, given the volume, that there were more than just day-traders, technicians and computers playing last night. Evidence of a solid bullish groundswell? Or are these the Johnny-come-latelies that signal a peak? At the moment it's difficult not to feel that the S&P 500 has 1220 in its sights – the April peak.

The rally in stocks was supported as usual by a fall in the US dollar index, down 0.3% to 77.07. Again, this might be attributed to a bit of a delayed response to the Fed (the rest of the world had to wait for yesterday's and last night's sessions) although euro strength was an individual factor. Last night the president of the German central bank, speaking in New York, suggested the ECB's program of buying eurozone government bonds (US$78bn to date in an effort to avert a further European crisis) should now be phased out “permanently”. Last night the euro briefly hit US$1.40 which was the pre-crisis high.

And the Aussie conquered another “big figure”, jumping another 0.4 of a cent to US$0.9905. Not long now.

Is gold looking toppy? Well, last night it didn't. Gold jumped US$21.60 to US$1372.40/oz. More Johnnies? Silver rose 3% to conquer US$24/oz for the first time.

Oil jumped US$1.34 to US$83.01/bbl but base metals were a little more subdued in London with increases of around 1%.

And a funny thing happened in the US bond market. Despite all the talk of QE2, demand for the Treasury's auction of US$21bn of ten-year notes was relatively muted. The settlement of 2.495% was again the lowest level since January 2009, but it was about 6 basis points higher than the 2.43% yield going into the auction. Foreign central banks bought only 41% compared to the 44% running average.

The result would tend to suggest the bond market rubber band has stretched about as far as it can and that QE2 is now fully priced in. But with 15 minutes to the close, one or more buyers piled in once more and sent the yield screaming down to 2.42% - down one basis point close to close. So go figure.

The SPI Overnight rose 30 points or 0.7%.

Google's result is due out after the bell tonight and during the session the monthly producer price index will be released, providing the first inflation reading since the Fed suggested it is inflation now being targeted. And the US trade balance will be released.

Today in Australia, Bank of Queensland ((BOQ)) releases its full-year result.

[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.]

article 3 months old

The Overnight Report: What Don’t We Know Now?

By Greg Peel

The Dow closed up 10 points or 0.1% while the S&P gained 0.4% to 1169 and the Nasdaq added 0.7%.

One feels there are a few rubber bands being stretched in global financial markets at present and that the extent of their elasticity is being tested. All things being equal, it was never likely to be a busy day on Wall Street ahead of the Fed minutes due out at 2pm and the Intel result due after the bell. Yet the Dow opened down 100 points.

While ongoing talk of Irish bank bondholders having to take haircuts was providing some disquiet across the pond, across the other pond China returned from holiday and Beijing wasted no time in announcing a 0.5% reserve requirement hike for China's six biggest banks (both state and private). The move was flagged on Monday and confirmed yesterday.

The move should come as no great shock given Beijing has made it abundantly clear it wants to keep a tight rein on Chinese economic growth. The last round of monthly Chinese data suggested renewed acceleration. While the reserve ratio hike was the fourth this year, Beijing has been quiet recently as it has watched the problems in Europe play out. No point in tightening the Chinese economy if Europe was going to do that anyway. But it would seem that Beijing is now content that the European crisis has been reduced to a simmer and not a rolling boil.

The announcement hit Australian stocks hard yesterday, leading to a 1.6% drop in the ASX 200 following a flat, holiday-impacted night on Wall Street. While it is no great surprise to see some selling in the face of Chinese tightening, one feels that profit-taking momentum was on a roll yesterday with impetus beyond just that of China.

As the Aussie dollar approaches parity, the market has begun to acknowledge that a strong Aussie is more of a concern than a novelty. Despite widespread broker upgrades to commodity price forecasts over the past couple of weeks, including more enthusiasm for iron ore, adjustments to Aussie dollar forecasts have netted to earnings downgrades for resources stocks. For non-resource sector exporters and collectors of foreign revenues, it's simply been a case of currency impacted downgrades.

In past times it would have been fair to assume the Aussie rubber band had stretched too far and a correction should be on the cards. But in the current situation we are no longer talking “free” markets. A currency war has erupted across the globe and despite Washington's protests to Beijing, at the centre of it all is the US Federal Reserve. If the Fed is hellbent on devaluing the greenback, then the Aussie has nowhere to go but up. And it is not the nature of the RBA to intervene beyond keeping a lid on excessive volatility.

While the adage is that “you can't fight the Fed”, Wall Street has been not fighting the Fed for weeks now. The S&P 500 has recovered levels not seen since May and it's all about QE2 expectations. With so much speculation built in to markets, just how much higher can we go, even if QE2 is announced, as expected, on November third?

This is the current dilemma for Australia. The higher the Aussie goes, the more it will impact negatively on GDP. If QE2 is announced as expected, there may even be a “sell the fact” response given so much built up speculation. And if the Fed disappoints, perhaps on size or timing, we could see quite a substantial pull-back. There's still three weeks to go.

When the Fed minutes were released at 2pm New York last night, there was an initial kick in the stock market. Stocks had crept back from their lows, but what was seen as a “QE2 upgrade” was enough to carry the Dow to 40 points up. There it met resistance before bungling through to the close.

The supposed “upgrade” came for this statement within the minutes: “several members noted that unless the pace of economic recovery strengthened or underlying inflation moved back towards a level consistent with the FOMC' mandate, they would consider it appropriate to take action soon”.

Previously the Fed had only touted QE2 being “ready if necessary”. Now we have a “soon”. And “soon” was taken by Wall Street to mean November third. Interestingly, new Fed vice-chair Janet Yellen took the opportunity to warn against the potential “asset bubble” implications if excessively easy monetary policy was left in place for too long. But this caveat seemed less like dissent and more like approval but with a wary eye in place.

So once again we had more evidence of pending QE2, but the stock market didn't really get excited. At the time of the release of the minutes, the US dollar dropped sharply as one might expect but only from earlier higher levels. The resultant net fall on the day of 0.25% to 77.31 is perhaps mounting evidence the world is overly short dollars and maybe a correction is looming.

The same can be said for the US bond market. When the Dow opened lower bond prices opened higher, such that the ten-year yield hit their lowest point since January 2009 at 2.34%. Thereafter the sellers came in, and on the release of the minutes the selling only intensified. If the Fed's going to buy Treasuries, yields should fall on the news. The ten-year closed up 4 basis points to 2.44%. Another very well-stretched rubber band.

Perhaps too, one could argue copper is taking a bit of a breather. With Chinese buyers back from holidays aluminium, lead, tin and zinc all jumped 1-2% last night. Bellwether copper was nevertheless steady. Note that the LME after-market shut before the release of the Fed minutes.

And then there's gold. Once again, if this was a “QE2 upgrade” then we'd expect gold to rally further, but instead it fell US$2.90 to US$1350.80/oz.

Oil fell US54c to US$81.67/bbl but oil was also playing out its own story. Last night President Obama announced the end to the moratorium placed on new offshore drilling which was put in place as a response to the BP disaster. Shares in oil services companies rocketed on the news as not only are they back in business, they're back in extended business given safety inspections will be dramatically stepped up.

What we will have however, for the next three weeks ahead of the FOMC meeting, is the bulk of the US third quarter earnings season. Last night after the bell Intel (Dow) announced earnings of US52cps (vs US50c estimate) and revenue of US$11.1bn (US$11.0bn). It was a slight “beat” and ongoing guidance was slightly more positive, but Intel had already downgraded guidance back in August to a lower base.

In after-market trade, Intel shares are up less than 1%.

The SPI Overnight had a lot to absorb, and while the Intel result does not smack of any great opening surge on Wall Street tonight the 35 point jump (0.8%) in the SPI would tend to suggest the futures market is assuming yesterday's action in the physical market to be somewhat of an overreaction.

After a mildly positive NAB business sentiment survey released in Australia yesterday, today we have Westpac's consumer confidence equivalent. And tonight sees the first of the big Wall Street banks reporting in the form of JP Morgan.

[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.]