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Alcoa has kicked off the earnings season with a modest beat, however for us it’s the commentary that is of interest, and it will be for the rest of earnings season. The fact it sees Chinese aluminium demand growing at 11% this year compared to 9% in 2012 is positive, but it also sees China GDP around 7.8% this year, which is above consensus.
Certainly for us there are two themes we are keen to explore in more depth through the coming weeks - the first being commentary from respective CEOs from companies with a global reach, including GE (reports on July 19), Coach (with its exposure to the increasing Chinese middle class), Freeport McMoran (July 23) and Caterpillar (July 24) as key bellwethers. In fact, it’s interesting to overlap BHP with Freeport and Caterpillar, as clearly they are moving in lockstep at present and any narrative around China and the real level of customer demand could have strong ramifications for other global stocks.
The other area we are keen to follow is around companies which are seeing first-hand the impact that the steepening US curve is having, not just directly on their business, but on the end consumer, especially with the recent moves in mortgage rates. Home builder Lennar recently detailed it hasn’t seen any impact on home sales of late, despite higher mortgage rates, however it will be interesting to hear from Bank of America and Wells Fargo and whether they disclose a level which may be a tipping point in the housing recovery. Pulte homes and DR Horton also report on July 25, and it will be interesting to see if they agree with Lennar. Still, it seems the fixed income market sees value in the ten-year US treasury above 2.70%, and as said yesterday the 2007 downtrend at 2.75% is the key line in the sand for now.
The key focus today in Asia was Chinese CPI, although we didn’t put as much credence on this metric given the main concern right now is lower growth driven primarily by banking reforms. It seems the 2.7% rise in consumer prices was taken negatively by the equity market, though not so badly by currency traders, with AUD/USD dropping to 0.9083, before reclaiming the 0.9100. Certainly there was a relatively violent move in the Hang Seng and CSI, and maybe the prospect of rising inflation forces (lead by increases in food and housing) amidst a backdrop of lower growth is a worrying equation, although one inflation print doesn’t make a trend. The inter-bank markets seem to be ticking along quite nicely, with the seven-day repo falling ten basis points to 3.6%; however this is a metric which should trend modestly higher throughout the year as funding conditions become tighter. All-in-all it seems sentiment towards the region seems poor and there are a number of bulls sitting on the sidelines waiting for clarity and a more stable base from which to put money to work.
Japan and Australia seem to be going the other way, with gains of over 1% a piece. In Japan local press (Sankei) suggests the Japanese minimum wage is set to rise 2%, which again feeds nicely into inflation expectations, while M2 money stock (which shows the change in the total quantity of domestic currency in circulation and deposited in banks) grew 3.8% relative to consensus of 3.4%. These are both small but progressive boxes to tick in the ever-evolving school of Abenomics. The ASX 200 is finding good buying activity on reasonable volume and is trading above the June 19 high of 4861. From a pure composition stand point, it’s always good to see the materials and financials firing ahead, despite a poor Chinese tape and terrible NAB business confidence print. Even gold stocks managed a squeeze higher, which can be attributed to some good buying in US treasuries yesterday, lowering the USD and causing some modest short covering from the leveraged community.
Interestingly, the ASX 200 has moved through +/- a 1.3% range in all of the last seven trading sessions, and ten of the last twelve. There is a clear war of attrition between the bulls and the bears at present, and generally you get heightened volatile when disagreement occurs. However, having printed a higher high we’d say the bulls probably have the upper hand right now.
European markets are starting to look quite compelling as well from an index perceptive. The FTSE has retraced just over 50% of the 12.4% losses made in May and June, while the DAX and CAC are just behind. In terms of data, the calendar is light with traders expecting a 0.2% increase in UK industrial production, while the Ecofin meeting concludes with traders keeping an eye on any narrative from the different speakers in the post-meeting press conference. We’ve been bearish on cable for some time and would potentially tighten stops to 1.5050, however the prospect of follow-through buying in US treasuries and subsequent lower yields could see further USD profit taking and we traders could look to add to shorts at 1.4970.