Overnight: Earnings Volatility

By Greg Peel

Closing In

The All Ordinaries index posted a new all-time closing high yesterday, falling 11 points shy of its all-time intraday high of 6873 on November 1, 2007. On the same day the ASX200 closed at 6828, 52 points above yesterday’s close, and the intraday high was 6828, 75 points away.

And closing in.

Commentary suggests yesterday’s euphoria was sparked by news the US trade delegation will fly to Beijing next week. I suggest that’s rubbish. It’s not bad news, but it was a fact already known on Tuesday and quite frankly, means little in term of US-China trade progress.

Instead, I offer you momo, FOMO, the Aussie and TINA.

Many an algorithm is programmed to chase the momentum (momo) trade on the basis that rallies tend to feed on themselves until they don’t. As the ASX200 approaches its all-time high, rather swiftly, underweighted investors are panicked into action on a fear of missing out (FOMO). Our own falling bond yields (ten-year 1.29% yesterday) are fuelling a stampede into the stock market and the weakening Aussie only makes our high-yield market even more attractive offshore.

And with some Australian bank deposit products already now offering zero, with two more rates cuts anticipated, it has never been clearer in history that there is no alternative (TINA) but investment in equity dividends.

Which is why our stock market is close to all-time highs when the RBA cash rate is at an all-time low, lower than the “emergency level” following the GFC. Westpac’s economists were the latest to join the chorus yesterday in forecasting two more rate cuts to 0.5% by early next year.

Front and centre in yesterday’s rally were the yield-payers, with the banks (+1.4%), telcos (+1.7%), bond proxies within industrials (+1.4%) and utilities (+1.0%) leading the charge.

Missing the boat, rather badly under the circumstances, were materials (-0.5%).

UBS yesterday downgraded its iron ore price forecasts, impacting on that group. Regis Resources ((RRL)) copped two broker downgrades to Sell following its production report and FY20 guidance, and five of the six FNArena database brokers covering the stock are now on Sell. Regis fell -11.7%.

Iluka Resources ((ILU)) also posted a production report, and fell -10.0%, as did Sandfire Resources ((SFR)), St Barbara ((SBM)) and Evolution Mining ((EVN)) which fell -4.0%, -2.8% and -1.0% respectively.

The gold miners, in particular, have for some time been considered overbought by analysts following the recent gold price run.

On the upside, rumours are someone will make a bid for Vocus Group ((VOC)). Bit of a broken record that one. Vocus rose 4.9% while Domain Group ((DHG)), which was thumped on Tuesday, bounced back 4.9%.

Just how high can we go? Last night the S&P jumped another 0.5% and the Aussie back down into the sixties. But our futures closed unchanged.

The air is getting thin.

Earnings Mix

Boeing reported its worst ever quarter last night which in itself is of little surprise, given the 737 Max situation, but a suggestion by the CEO the 737 Max production line may have to be shut down for the time being led the stock down -3%.

Caterpillar bemoaned loss of business in China, as anticipated, but also reported a big drop in demand from US shale. It dropped -4.5%.

But for these two companies, the Dow would have closed higher last night.

On the flipside, chip-maker Texas Instruments saw its shares soar 7.5%, dragging the whole chip sector, which is heavily dependent on China trade/Huawei outcomes, to a new all-time high. Snap Inc, which I suppose one calls social media, jumped 19% on its earnings, albeit this stock has been a dog ever since its IPO.

Telco AT&T (Dow) gained 4.5% on a beat on subscriber growth and economic bellwether United Parcel Service leapt 8.5% on an earnings beat.

Moving on to the after-the-bell action, Facebook is little changed post its result release, Ford (Dow) is down -6%, Tesla is down -9% and PayPal is down -4.5%.

So draw your own conclusions. What is notable is that despite a seeming excess of earnings beats to date, net S&P earnings growth is flat on the quarter, and guidance suggests -3% contraction in Q3.

US economic data last night were also mixed, with new home sales increasing for the first time in three months, by 7%, and a flash estimate of July manufacturing PMI suggesting a drop to 50.0, dead flat, from 50.6 last month, which would be the slowest pace of growth in a decade.

It is still assumed the Fed will cut by -25 basis points next week, and many believe it will be -50 points, if not all in July at least over two meetings.

What will be critical is tonight’s ECB policy meeting, Draghi’s last before Christine Lagarde takes the reins. ECB easing is seen as one prominent driver of the perceived need for the Fed to pull back to the pack.

Commodities

The US dollar takes a breather, and base metal prices surge. The underlying impetus is falling Chinese stockpiles.

Back from a day off, iron ore drops -2.5%.

Gold has recovered all and more of what it lost on Tuesday night.

Guess what? The weekly US crude inventory numbers caused surprise. Supply has bounced straight back from hurricane disruption.

The Aussie is 0.4% to US$0.6976. Don’t get your paisley out just yet.

Today

The SPI Overnight closed “unch”.

The RBA governor will speak today.

The ECB meets and the US sees durable goods orders data.

Fortescue Metals ((FMG)) and Newcrest Mining ((NCM)) release production reports.

Macquarie Group ((MQG)) holds its AGM.

The Australian share market over the past thirty days…