Let’s recap, because 57% of S&P 500 corporates have reported earnings, and we find 78% have beaten the streets forecast on earnings, by an average of 5.2%, while 72% of beaten on sales. Great numbers, but that’s not going to surprise, as this level of beats are only modestly above the average we see over past quarters.
What is positive though, is aggregate EPS growth thus far is an impressive 10.6%, with top line growth at 6% and both numbers are nicely higher than what was expected going into reporting season. With valuations getting quite a bit of focus, this is the sort of earnings growth that will keep the bulls happy, yet far more needs to happen going forward if we are to avoid a correction in Q417 to Q118 when we step back from liquidity driven markets to one where we go back to our roots and look at return on equity and earnings growth.
How many companies do we see trading at a discount to intrinsic value? Not many.
The earnings batton though has been handed to Japan, where we see over 350 companies reporting today alone. It’s also a busy reporting calendar in Europe too, so European equity markets should be well traded and specifically, I will be watching the German DAX, where price action is looking very interesting indeed, with price closing the gap from 21 April and Friday's candle looks like clear exhaustion from the sellers.
A move through Fridays high today and I would be looking for a rally in the DAX, potentially into 12,500. Of course, Aussie earning season officially kicks off tomorrow with Navitas and then RIO being the biggy. Again, the focus for me is not so much about whether corporates can beat the street's forecasts on earnings, but whether the outlooks are sufficient and inspirational enough for the market to break the 5850 to 5675 range it’s been in since mid-May.
The key focus for so many macro traders and investors is around inflation and inflation expectations. US data then hogs the limelight, although tomorrows RBA meeting and Fridays Statement on Monetary Policy will be a key focal point locally too.
Recapping, on Friday, we saw US Q2 GDP print 2.6% that was a touch below expectations, while the ECI (Employee Cost Index), which is a compensation measure the Federal Reserve look at closely, came in at 0.5%, falling 30 basis points from the prior quarter. Neither were great numbers and it was not surprising to see the US 10-year treasury yield fall three basis points (bp) to 2.28%. Inflation expectations remain firm there though, and one suspects that will happen with the USD having fallen 10.2% since January. So with inflation expectations staying firm, we have seen ‘real’ yields falling across the curve and this is great for gold, terrible for the USD.
Absolute calamities in the Trump administration are not helping either and what an amazing few days of news flow. We have seen with key personnel changes, in fighting in key divisions, all amid a backdrop where despite holding both Senate and House the Republicans can’t get anything passed. Healthcare was supposed to be well and truly passed now, allowing the fiscal offset to push through sweeping tax reform. Clearly, that’s a 2018 story now!
As mentioned, it’s all about economics now, with US core PCE, personal income, vehicle sales, manufacturing and services ISM and US non-farm payrolls in the mix. Will we see further lows in the USD this week? Watch the US 10-year treasury for a break of 2.33% or 2.22% as a guide for USD flows, while a shorter-term rates markets will be interesting with fed funds future now pricing a 40% chance of a hike by the December meeting.
I mention the USD as a central theme for traders, but for FX traders there has been a huge shift to sell CHF and sentiment towards the ‘Swissy’ has deteriorated significantly. GBP/CHF rallied 3.5% last week, which is a huge move when we adjust for leverage. AUD/CHF has flown too and eyeing a break of the February highs, so put that on the radar too with the Australian event risk in play this week.
So an eventful week ahead, but the Asia market open looks quite constructive at this stage and while the S&P 500 fell 0.1% on Friday, SPI futures closed 24 points higher. Our call for the ASX 200 currently sits at 5718, with BHP eyeing a solid open, 1.7% higher and the fact US crude rallied 8.6% last week has been a strong tailwind. The index and commodity futures open at 8:00am AEST shouldn’t see too many fireworks judging by the unchanged reads we have seen in the FX open this morning and although the US oil rig count gained by two rigs, I suspect pullbacks in the oil price should be supported and we will be watching for a move into $50. The
S&P 500 energy sector closed 0.19% lower on Friday, by way of a guide here.
We can also see spot iron ore falling 2.1%, however, futures markets have been strong, with iron ore and steel futures gaining 3.1% and 1.2% respectively. Copper closed unchanged at $2.875, although the trend remains higher.
