Overnight Sentiment: Defending 1400 and 1.29
There have been no major overnight events or surprises, with Europe continuing a war of semantics whether the Spanish bailout is a bailout, and attempting to avoid it as long as possible while reaping the benefits of Spanish bonds which are trading at post-bailout levels for a 3rd months now, as well as whether Greece will receive more Troika money (the WSJ reported that Greece requires €30 billion through 2016 to close its funding gap: a number which will eventually double, then triple), and yet as of moments ago the EURUSD slipped under the psychological 1.2900 support, which also means that 1400 on the SPX cash is in play. Italy did not help after business confidence declined from 88.3 to 87.6 on expectations of a rise to 88.7 What news there has been is largely the realization that reality is here to stay, following misses and guides lower from Amazon and Apple, and no matter what some low-volume algo tries to represent by buying the stock in the after hours session, profitability and cash flow creation for both companies will be lower going forward. In terms of newsflow, the NYT released a report last night that China's Premier may have been hiding billions in "related-party" transactions - imagine that, and one which promptly got the NYT blocked from China's internet. Obviously this is a touchy topic for China days ahead of its internal party vote, and one which will hardly score the US brownie points with the domestic administration. Concurrently, Japan announced a new fiscal "stimulus" for a whopping ... $9.4 billion. That is roughly the amount of money needed to evade deflation for 2-3 hours. More apropos, Bild reports what Bloomberg noted earlier, namely that Merkel has no majority for reported Greek aid, further blowing up the hole that Greek finmin Stournaras dug himself in with his lies earlier this week. So while everyone is once again on edge, with the Shanghai composite sliding 1.7%, and key technical levels either breached or in play, today's session promises to be quite interesting.
Here is what to look forward to as US traders come in, via SocGen:
Risk and volatility down, USD and core yields (swaps) up. This is how markets have fared this week and barring a whopping US GDP number this afternoon, this is probably how markets will close this week. The rise in core yields and a higher USD/JPY despite lower stocks is odd (generally USD/JPY falls when stocks fall), and it will take some time to figure out whether market dynamics are changing. Speculation of additional BoJ easing (reports suggest meeting next week will boost APP by JPY10tr and, commit to a 1% inflation target) but there have been many false dawns in the past. For USD/JPY , a break above the 200d ma set in motion a 7.9% rally in February/March and a 2.4% in June. A repeat would in the worst case scenario see the pair reach 81.30 (+2.4% from 80.10), in the most bullish scenario 85.60 (+7.9% from 80.10). A stronger GDP number and higher UST 2y yields would be a start. However, sluggish employment growth is one reason why we should not expect fireworks from the advance estimate of US Q3 GDP today. Weak core durable goods orders and shipments data yesterday was a cause for our US economists to fine-tune their forecast for annualised growth down to 1.6%. With inventory build estimated at 0.3ppt, that means real growth of only 1.3%, or 0.325% qoq. Not a number for risk assets to get carried away.
Elsewhere, focus will be on Italian business confidence, the Swiss KOF leading index, and Swedish trade data. A dovish statement by Sweden's Riksbank yesterday (two committee members voted for an immediate cut) suggest a rate cut could follow in December. This explains why the SEK should end the week at the bottom of the G10 table (with the NOK).
Finally, for those who slept through it, here is a comprehensive summary of the past 24 hours via Deutsche Bank:
US equities once again lost momentum after a solid open yesterday with the S&P500 closing 0.30% higher even though the index traded as high as +0.9% in the morning. Technology stocks (-0.17%) drove much of the move lower and the tech sector has now underperformed the broader index by 5.2% since the last peak on September 14th. Yesterday's performance wasn’t helped by Apple who closed 2% down from the intraday high (-1.2% for the day) ahead of their Q4 earnings which were announced post-market close. Despite selling 27 million iPhones, 14 million iPads and 5.3m iPods, Apple’s Q4 earnings still managed to miss consensus EPS estimates (by 1%) due to a combination of lower margins and supply constraints. In addition, the company provided EPS guidance for the current quarter of $11.75 per share on revenues of $52bn, which were below prior estimates of $15.49 per share and $55 billion respectively, on lower margins particularly for its iPad mini.
More broadly, the current earnings season’s theme of strong EPS performance against weaker revenue continued yesterday with 76% companies beating on the bottom-line but only 37% beating on the top-line across the 54 S&P companies who reported on Thursday.
Apple’s earnings have set a weaker tone for Asian trading overnight with most bourses trading lower. Losses have been led by the Shanghai Composite (--1.6%) and Hang Seng (-0.8%) as a number of poor earnings from Chinese cyclicals weigh on sentiment. The Nikkei is outperforming on a relative basis (-0.7%) after the government unveiled a JPY750bn stimulus package and USDJPY is trading marginally lower (-0.3%) after the release of Japan’s CPI which was marginally firmer than expected (-0.3%yoy vs -0.4%). In the credit space, markets are trading unchanged to marginally weaker with Australian and Asian IG indices +0.5bp and 2bp wider respectively.
Today’s focus will be on the US GDP print which is due at 1:30pm London time. DB’s Joe Lavorgna expects a 1.7% increase in Q3 real GDP helped by moderate growth in private domestic demand. Residential investment (+10% expected vs 8.4% previously) will be a key driver for domestic demand, while consumer spending led by retail sales (+2.2% forecast) is also expected to contribute. On the business side, our US economics team expects corporate spending to show little or no growth in Q3. Indeed, yesterday’s September durable goods report confirmed the extent of corporate indecisiveness ahead of the upcoming election and “fiscal cliff”. The headline durable goods print rose +9.9% (vs 7.5% expected) but this was attributed almost entirely to aircraft orders which rose over 5x in the month. Notably, core capex orders (which exclude aircraft) were unchanged on August, and are down 7.4%yoy.
Elsewhere in Europe, the FT reported overnight that Greek junior coalition partners have not agreed on the labour reforms proposed between the Troika and the Greek PM/finance minister which are part of a revised programme granting a 2yr extension for Greece to hit deficit targets. Despite the delay, troika officials met in Brussels to begin negotiations over how to fund the revised programme which is expected to cost an additional EUR18bn. EU officials are reportedly opposed to haircuts on existing loans and are hoping to complete adeal before the November 13 ECOFIN meeting (FT). S&P downgraded a number of French banks overnight, including BNP Paribas (from AA- to A+) citing the potential for a protracted recession. S&P also placed 10 banks on negative outlook including Socgen and Credit Agricole. Newswires are reporting that Spain has approved initial payments to Valencia and Andalusia from the central government’s regional bailout fund.
In other stories, there was talk of an imminent downgrade of the US sovereign rating by Fitch, which helped drive some of the mid-morning fade in US equities. Fitch rates the US at AAA with negative outlook. The rating agency declined to comment on the headlines but referred to its July 10th report which said that the US rating or the outlook will be resolved by late 2013. Ironically US treasuries rallied on the initial headline, but 10yr yields finished the day up 3.5bps following a mixed 7yr auction.
Looking at the day ahead, the focus in the US will be the Q3 GDP report together with the final UofMichigan consumer sentiment reading for October. It will be a relatively quiet day for earnings with only 13 S&P500 companies reporting. Ahead of that, consumer confidence data is scheduled for Germany and France. We may see more Spain-related headlines with the country’s Q3 unemployment report due, together with Banco Popular, Bankia and Caixabank all reporting earnings today.