Cracks appear in US earnings

The impact of global growth is slowly starting to be reflected in corporate earnings with an underwhelming reporting session in the US setting the tone for global markets.

Apple
Source: Bloomberg

Apart from Apple which smashed estimates, the majority of reporting companies missed expectations. Key economic bellwethers such as Caterpillar and Microsoft disappointed with the stronger US dollar playing a role. Caterpillar is experiencing weaker demand from energy companies as oil and other commodities prices plunge and a stronger greenback is making it more expensive for overseas buyers. Caterpillar plunged around 7.5%, Microsoft was down 8.5% and Procter & Gamble lost 3.6%. Already we have been seeing weakness in the big financials as trading conditions tightened. The fact that earnings are also struggling in other sectors set off the alarm bells and resulted in investors exercising caution ahead of the results from the Fed meeting which concludes today. Not much change is expected from the Fed after the detailed commentary from the last meeting. The committee is likely to maintain most of its views with key phrases around rates lift-off reinforced. I doubt the Fed’s assessment of the economy would have changed much since the last meeting and while global pressures are ramping up, the Fed is only likely to respond to this once it has a material impact on US data. Additionally, effort being made by other key central banks across the globe is likely to gradually help limit the impact. The level of job creation will remain a positive while the risk to the inflation profile will warrant some caution.  

Local CPI lifts AUD

Markets around the region have been quite choppy today with equities mainly struggling. Australia’s Q4 CPI data has drawn some attention and managed to trigger a bit of a recovery for the AUD. The headline Q4 CPI reading showed a 1.7% rise year-on-year, which was slightly below an estimate of 1.8%. This was also a sharp drop from the prior reading of 2.3% and represented the weakest reading since 2012. However, the trimmed mean figure was better than expected on a quarterly basis (+0.7%) and in line year-on-year at 2.2%. Given the recent drop in oil prices and some of the challenges the domestic economy has been facing, it seems there was a very pessimistic view heading into the data, which probably explains the AUD weakness ahead of the release. The pair has since bounced back and is currently testing the psychological $0.8000 level. It seems the feeling is that this largely reduces the probability of the RBA acting imminently. While the swaps market is still pricing in a high chance of at least one rate cut this year, the combination of the recent jobs numbers, trade balance and this CPI reading mean we are likely to see some of the short-term expectations of an imminent cut pared right back.

Firmer open for Europe

Looking ahead to European trade, we are currently calling European markets firmer after yesterday’s pullback. Activity was quite limited on the European calendar yesterday with the UK's GDP being the most significant reading. Today, we have consumer confidence readings to look out for Germany and of course any developments on Greece present headline risk. The appointment of Yanis Varoufakis, who has suggested Greece should default on its debt in the past, was taken as a negative by markets yesterday. Regardless, the euro has been firm against the greenback but I feel this run doesn’t have much longer to go. It doesn’t take much to spook the euro at the moment and given a downtrend resistance line kicks in in the 1.1400 region, traders are likely to be eyeing fresh selling opportunities. While there isn’t a lot going on with the euro, there is still some risk on the USD side of the equation with the Fed meeting concluding. 

 

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