Following yesterday's earnings disappointments, most notably from Microsoft which is down 7% this morning following the usual after-the-fact downgrades from JPM, Citi and Nomura, futures were already on a the back foot heading into this morning - no doubt impacted by the deja vu ridiculous move in the EURCHF noted earlier - when the latest batch of earnings just hit, of which Dow component Procter and Gamble stood out and which missed revenue of $20.16Bn (est. $20.67Bn) and EPS of $1.06 (est. $1.13).
How P&G justified the weak quarter is actually a good summary of macro events in Q4: "The October - December 2014 quarter was a challenging one with unprecedented currency devaluations. Virtually every currency in the world devalued versus the U.S. dollar, with the Russian Ruble leading the way. While we continue to make steady progress on the strategic transformation of the company - which focuses P&G on about a dozen core categories and 70 to 80 brands, on leading brand growth, on accelerating meaningful product innovation and increasing productivity savings - the considerable business portfolio, product innovation, and productivity progress was not enough to overcome foreign exchange.""
But the punchline, and in direct refutation of what Jack Lew said previously about a strong dollar being good for the US economy, was this:
"The outlook for the year will remain challenging. Foreign exchange will reduce fiscal 2015 sales by 5% and net earnings by 12%, or at least $1.4 billion after tax. We have and will continue to offset as much of this currency impact as we can through productivity driven cost savings. And we will continue to invest in our businesses, brands and product innovation, because it is the right thing to do for the mid- and long-term, while we deliver another year of strong cash returns to shareowners. We are adjusting fiscal year earnings targets accordingly
In other words, P&G will "offset" the surge in the USD with more layoffs. So when Jack Lew said "good" he really meant "bad."
Expect many more EPS misses and warnings in the coming days and months as the year end 2015 S&P consensus target crashes and burns and as the sellside penguins are finally forced to admit what we said in November: that 2015 earnings will be lower than 2014, which in turn were lower than 2013 on a GAAP basis. Not a pretty pattern.
In other macro news, Asian equity markets mostly rose with the exception of Chinese bourses; Shanghai Comp (-0.6%) and Hang Seng (-0.4%) both closed lower after Chinese December Industrial Profits Y/Y (-8.0% vs. Prev. -4.2%) printed their biggest fall on record. Nikkei 225 (+1.3%) approached a 1-month high underpinned by risk on sentiment and a weak JPY. ASX 200 (+0.8%) traded in the green despite weakness in basic materials after yesterday’s iron ore slump which saw prices touch a 5 and a 1/2yr low.
As previously noted [32], the main FX move of note this morning was a sharp rise in CHF to an intraday high of 1.0382 before paring the move later in the session. This comes amid speculation of SNB intervention after a reiteration overnight from SNB deputy Danthine, who stated once again that the central bank is prepared to conduct FX intervention. However, the move has proved very short lived with the cross now trading sub-1.0100 as the market continues to test the might of the central bank.
Analysts at IFR suggest that the SNB may prefer to focus their attention on USD/CHF rather than EUR/CHF, due to the risks attached to holding EUR reserves amid the uncertainty that has developed as a result of the Greek election and the announcement of QE by the ECB. Elsewhere, the only tier 1 data this morning was the UK Q4 advanced GDP which came in at 0.5% vs. Exp. 0.6% (Prev. 0.7%). However despite a brief fast money move lower in GBP/USD the reaction was not sustained with the pair broadly flat heading into the US session.
Over in Europe, equities spent the majority of the day in negative territory, trending lower with no fundamental reason behind the move. The SMI, however bucks this trend and currently resides in positive territory as a consequence of the weakening in CHF early in the session. Meanwhile, with regards to fixed income, the GR/GE 10y spread is over 50 bps wider today as a continuation of yesterday’s post-election price action, while Bunds have ticked higher as a consequence of weakness in equities.
Also of note, we did have supply today from both Italy and the Netherlands however this failed to impact the broader market. Both Danaher (DHR) and DuPont reported relatively weak earnings, citing the strength in the USD, with this being a theme throughout earnings season so far as Johnson & Johnson (JNJ) and United Technologies (UTX) have both said similar. Microsoft (MSFT) also announced that FX was hurting business and trade lower by around 6.5% in pre-market trade.
Today’s European session has so far been choppy in the commodity complex with WTI crude futures straddling the USD 45.00 handle, as it did for most of yesterday’s European morning as well. Later today we’ll see US API crude inventories, which last week saw a larger than expected build. In terms of news, Saudi Aramco CEO says that Saudi Arabia are not to blame for the market imbalance seen in the oil market and added that ‘nobody can dictate a fair price for oil’. (RTRS) Elsewhere, UBS have cut this year’s Brent forecast to USD 52.50/bbl from USD 69.75, and sees 2016 Brent price at USD 67.50/bbl from USD 80.00 and the bank also cuts their WTI crude price for this year to USD 49.00 from USD 64.75/bbl and next year to USD 62.50/bbl from USD 75.00/bbl.
Bulletin Headline Summary from RanSquawk and Bloomberg
- Large volatility seen in EUR/CHF which briefly touched 1.0382 this morning before paring the whole move as suggestions of SNB intervention proved decidedly short lived
- Stronger USD continues to weigh on corporate US earnings with Microsoft down 6.5% pre market.
- Looking ahead, main US data comes in the form of Durable Goods Orders, Services PMI, New Home Sales, Consumer Confidence Index and Richmond Fed Manufacturing Index
- Despite this, many European participants are anticipating a quiet US session, with volumes to be light amid heavy blizzards in the US
- Treasuries steady; trading and corporate issuance may be slow as
northeastern U.S. digs out from snowstorm that was not as bad as
anticipated; NYC may get no more than a foot of snow vs warnings for as
much as three feet. - $26b 2Y and $15b 2Y FRN auctions rescheduled to tomorrow, while 5Y rescheduled to Thursday at 11:30am, followed by 7Y at 1pm
- Durable goods orders and new-home sales data will probably come out shortly after their scheduled release times of 8:30am and 10:00am, respectively
- The Swiss National Bank reaffirmed its willingness to intervene in markets, sending the franc to its weakest level against the euro since the institution abandoned its cap
- U.K. economic growth grew 0.5% 4Q, less than forecast, as shrinking production and construction countered strength in consumer demand
- With 100 days until the U.K. general election, Prime Minister David Cameron’s Conservatives took the lead in three polls; U.K. Independence Party leader Nigel Farage predicted his party will win at least five seats
- Chinese industrial companies’ profits declined the most in at least three years last month, underscoring the challenge facing the nation’s former growth drivers as the economy slows and commodity prices slump
- Euro area finance chiefs signaled their willingness to do a deal with Alexis Tsipras, so long as the new Greek prime minister drops his demand for a debt writedown
- EU leaders threatened to tighten sanctions on Russia as soon as Thursday in reaction to renewed attacks on eastern Ukraine by pro-Kremlin separatists
- Israel’s Netanyahu said yesterday he “strongly objects” to the terms of a proposed nuclear deal with Iran, suggesting the odds of reaching a deal to prevent Iran from developing nuclear weapons are growing longer
- Saxo Bank A/S says it is bracing itself for lawsuits from some clients who may be unhappy with its efforts to have them cover losses on their Swiss franc accounts.
- Sovereign yields mostly higher; Greek 10Y yields surge 45bps. Asian stocks mostly higher, with Nikkei gaining, Shanghai lower, European stocks fall, U.S. equity-index futures decline. Brent, WTI and gold steady; copper falls
US Event Calendar, mostly delayed:
- 8:30am: Durable Goods Orders, Dec., est. 0.4% (prior -0.7%, revised -0.9%)
- Durables Ex-Transportation, Dec., est. 0.6% (prior -0.4%, revised -0.7%)
- Cap Goods Orders Nondef Ex Air, Dec., est. 0.9% (prior 0.0%, revised -0.5%)
- Cap Goods Ship Nondef Ex Air, Dec., est. 1% (prior 0.2%, revised -0.2%)
- 9:00am: S&P/CS 20 City m/m, Nov., 0.65% (prior 0.76%)
- S&P/CS Composite-20 y/y, Nov., est. 4.3% (prior 4.50%)
- S&P/CaseShiller 20-City Index NSA, Nov. (prior 173.36)
- S&P/Case-Shiller U.S. HPI y/y, Nov., est. 4.6% (prior 4.64%)
- S&P/Case-Shiller U.S. HPI NSA, Nov. (prior 167.11)
- 9:45am: Markit US Composite PMI, Jan. prelim. (prior 53.5)
- Markit U.S. Services PMI, Jan. prelim., est. 53.8 (prior 53.3)
- 10:00am: New Home Sales m/m, Dec., est. 2.7% (prior -1.6%); New Home Sales, Dec., est. 450k (prior 438k)
- 10:00am: Consumer Confidence Index, Jan., est. 95.5 (prior 92.6)
- 10:00am: Richmond Fed Mfg Index, Jan., est. 5 (prior 7) Central Banks
In conclusion, here is DB's Jim Reid with an early summary of events
Whilst the Greek election may have rated as noisy on the political spectrum, on the market spectrum beyond Greece’s own shores it has so far been a whimper. Whilst Greek 10y yields rose over 60bps to close the day at 8.8% and the Greek ASE index closed the day down over 3%, markets around the rest of the world were relatively sanguine with the Italian and Portuguese 10y government yields actually closing the day lower (although Spanish and core rates did rise around 4bps), the Stoxx 600 closing up +0.55%, led by the DAX up +1.4%, and the S&P500 up +0.3%. In European credit Itraxx Main and Xover both closed the day tighter (by -2bps and –8bps respectively) as did the financial senior and sub indices. Even EURUSD managed to bounce of its lows. Given this reaction it seems that so far markets are pricing in either that (a) Greece’s Syriza government will cut a deal with the Troika or (b) potential “Grexit” does not matter beyond Greece and we are unlikely to see a return of more broad-based periphery stresses. Especially in light of the ECB’s huge QE program announced last week, neither view seems unreasonable.
In terms of developments over the past 24 hours in Greece, first the left-wing, anti-bailout Syriza joined forces with the right-wing anti-bailout party the Independent Greeks to form a majority government and Alexis Tsipras, leader of Syriza, was sworn in as Prime Minister. On the other side of the newly dusted off European bargaining table we had a number of comments from European finance ministers who met in Brussels staking out what can broadly be described as a constructive tone with a hard edge. The Belgian Finance Minister was quoted by the VRT network saying Greece "must respect the rules of monetary union" but added that there was room for flexibility (BBC) and the Eurogroup working head Wieser said that he forecast, “that an extension of the (Greek bailout) programme will have to happen." (Reuters). The German Foreign Minister said, “"we offer to work with the Greek government, but we expect them to stand by agreements." (Reuters). On a similar note the chairman of the Eurogroup, Jeroen Dijsselbloem said, "There is very little support for a write-off in Europe,” From the ECB’s side, Benoit Coeure said, “There is no room for unilateral action in Europe, that doesn't exclude a discussion, for example, on the rescheduling of this debt.” (Reuters). We have the replay details for DB’s conference call yesterday on Greece at the end.
Looking to the near horizon, the next important development in the situation will come later today when Tsipras is expected to name his government cabinet, with the focus on who he will name finance minister to head up talks with the Troika. At the moment the front runner for the post is Yanis Varoufakis (BBC). He is quoted yesterday as saying, “We will take to the eurozone a plan for minimising this Greek debacle, we are going to put three or four things on the table: genuine reforms and creating a rational plan for debt restructure.. we want to bind our repayments to our growth.” (BBC). After this focus will likely turn to whether the new Greek government can get an extension on its bailout program which expires at the end of February.
Outside of Greece there were a few other major news stories. Russia’s foreign-currency credit rating was cut to HY (BB+) by S&P, putting it below IG for the first time in 10 years. In response the ruble sold off with USDRUB rising +7.8% on the day, although the further 1% drop in WTI prices and continued fighting in eastern Ukraine also didn’t help. In terms of major macro data yesterday it was relatively quiet with no major releases from the US whilst from Europe we had Spanish PPI reads (which came in lower than expected) and the latest German IFO confidence and expectations surveys (which came in broadly higher).
Overnight in Asia markets have been mixed as despite a relatively strong open on the back of the European and US sessions many have now sunk into the red on the back of a weak industrial profits read in China, which fell 8% YoY in December. This was the biggest drop since at least October 2011. Whilst the Shanghai Composite is currently trading down around -1.8% and the MSCI Apex 50 is down around -0.5%, Japanese equities are outperforming, with the Nikkei up around +1.4%. Asian credit indices are trading marginally tighter.
Looking to the day ahead and market liquidity may be affected by the huge blizzard which hit the north east of the US today with many transport links closed down in preparation. An emergency situation has been declared in the states of New York, New Jersey, Connecticut, Rhode Island, Massachusetts and New Hampshire with some 60m people possibly affected. In terms of macro releases we will have UK Q4 GDP (expected to slip to +0.6% from +0.7% QoQ), EU finance ministers will be meeting in Brussels to discuss Ukraine and debate EC President Jean-Claude Juncker's 315 billion-euro investment program proposal and over in the US we will have December durable goods orders (expected in at +0.4%), house price data and the January composite and services PMI. The FOMC also begins its two day meeting.
On the earnings calendar today we have Siemens and Novartis in Europe, whilst in the US we have Lockheed Martin, Pfizer, P&G, Caterpillar, AT&T and Apple all reporting.