The Overnight Report: When Earnings Beats Matter

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By Greg Peel

The Dow closed up 100 points or 0.5% while the S&P gained 0.3% to 2477 and the Nasdaq rose one point.

And back we go

I posed the question yesterday of “can we hold?”, referring to the much tested 5680 level for the ASX200, and the answer was not only a “yes” but yet another strong bounce off the 200-day moving average. The market does rather boggle the mind at present.

I also suggested that were the index to bounce, energy would be a leader given a strong move up in the oil price overnight, and having fallen sharply on Monday. Well energy closed down -0.3%. The only other sector to finish in the red was telcos (-0.9%) which had held steady in Monday’s fall.

Every other sector finished in the green. The banks (+0.6%) found favour once more, as they tend to do when the index falls back to support. Materials (+0.9%) were strong on commodity price support. But the real movers were the sectors most beaten down in recent trading. Consumer discretionary jumped 1.3% and healthcare 1.6%.

For the former, weakness has largely centred around Amazon, high levels of household debt and low wage growth. For the latter, the strong currency has proven quite a headwind of late. I also suggested yesterday the market appeared to be exhibiting little faith in the upcoming earnings season. But as dip-buyers seek out the poorer performers, it may be that they are positioning for some not-as-bad-as-thought results.

Or perhaps this market has just become completely robotic. If the ASX200 bounces off support every time and runs back up towards the top of the range every time, why not stick with the strategy until it doesn’t work?

Last night saw big jumps in commodity prices and a rally on Wall Street following some strong earnings results among Dow components. The futures closed this morning up 42 points – a magnitude of pre-market move one does not see very often. On Friday and Monday everything looked ugly. Yesterday, and presumably today, everything will be rosy once more.

Fries with that?

The theme of US earnings season so far has been to take profits in companies considered already well-valued even if they beat estimates. We saw that last night with Alphabet (Google) having posted aftermarket the evening before. It fell -3%.

Among the Dow stocks, of which Alphabet is not one, typically staid old manufacturer 3M showed it’s not a good idea to miss on revenue expectations, and it dropped -5%. Sell ‘em if they’re good and sell ‘em harder if they’re bad. But if they’re really good…

McDonalds, which has not been a strong performer of late, solidly beat expectations and rallied 4.8%. Caterpillar, which had been out of favour on previously sluggish Chinese growth, smashed expectations and jumped 5.9%, having provided an upgraded outlook on renewed Chinese strength.

It was a night for the Dow to outperform, and for once the Nasdaq to take a back seat. Despite Alphabet, the Nasdaq still manage to trip over the line with a 0.02% gain and another record. The S&P subsequently also hit another record.

Proving underlying support was the energy sector.

Fresh on the tails of Monday night’s announcement by Saudi Arabia it would cut oil exports, and that Nigeria would cap production, last night’s spin of the US weekly inventory data chocolate wheel came up with a much bigger than expected drawdown. That’s the number from the American Petroleum Institute, at least. As we know, the equivalent result from the Energy Information Agency, due out tonight, can be very different.

WTI has leapt 4.6%. The US energy sector followed suit. Suddenly everyone decided to bail out of bonds, sending the US ten-year yield up 7 basis points to 2.33%. Rising US rates are good for US banks.

And underscoring it all was last night’s monthly read on US consumer confidence for the Conference Board. At 121.1, up from 117.3 last month, the index has hit its second highest level since 2000 (which was presumably just before the Tech Wreck). The strong US labour market is the driver of current confidence.

Over in Washington the soap opera continued. Trump is yet to decide whether to sack his attorney general for refusing to face the tribunal on The Russia Thing, while the Senate has voted to proceed to take a look at repealing Obamacare without a replacement policy, albeit only parts of Obamacare, thus introducing the word “skinny repeal”.

Wall Street paid no attention.

Commodities

West Texas crude is up US$2.13 at US$48.61/bbl.

Strikes in both Chile and Indonesia are currently supporting the copper price, but last night LME traders decided all the signs were good for a return to stronger Chinese growth. Chinese imports of copper concentrate are growing and Caterpillar last night confirmed a better outlook. Copper jumped 3%.

It was not alone. Aluminium gained 1%, nickel and zinc 2% and lead 2.5%.

Iron ore jumped US$2.80 or 4% to US$69.70/t.

The US dollar played no part, rising less than 0.1% to 94.07. Gold eased -US$5.40 to US$1249.60/oz.

The Aussie is a touch higher at US$0.7936.

Today

The SPI Overnight closed up 42 points or 0.7%. While timely, it’s hard to deny the resource sectors will provide support today.

Then it will be all about this morning’s June quarter CPI release. The RBA governor will be speaking thereafter.

The UK will release its first estimate of June quarter GDP tonight.

The Fed will issue a policy statement which is expected to contain no surprises. Wall Street will be looking for hints as to when the central bank might begin winding back its massive balance sheet, but is not expecting to be given a date.

Independence Group ((IGO)), St Barbara ((SBM)) and Senex Energy ((SXY)) post quarterly production reports today.

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