Caterpillar takes centre stage in US trade

Clearly the ‘as goes Apple, as goes the stock market’ mantra is over, and this can be seen in US futures which haven’t really reacted, despite the tech giant rallying in after-hours trade.

Whether this earnings result is the start of a new trend is yet to be seen, but talk of introducing new products in October, or at least providing more details, has caught the market’s attention and some will be hoping to see some new initiatives to really put them on track to target $34 to $37 billion in revenue for Q4. It has to be said though that on its current multiple, this is not an expensive stock and there are kickers along the way. A close above the July 17 high of $434.87 today would be positive and bring out further momentum-focused buyers.

Caterpillar takes centre stage though in upcoming US trade, and while the name has a strong pedigree in earnings (having risen on the day in eight out of the last ten quarterly reports), we will be keen to hear its view on global, US and Chinese growth. Especially in light of Freeport McMoran’s call yesterday that it is seeing improved copper demand and strong Chinese demand. Caterpillar’s current view stands at 2.5% for both the US and global growth, but its view on China which may take a hit, as this stands at 8% or greater and is well above current consensus. Rarely can a stock move other asset classes, but when you are so leveraged into China, Caterpillar’s comments count. It also needs to be remembered that there is a decent amount of short interest in this name, including Jim Chanos who has been on record saying he has been looking for downside; a result above $1.68 on the EPS line or $14.88 billion on the top line could see short cover, while guidance above $7.00 for the year would also help.

China is again at the heart of the news flow in Asia, and there’s further fodder for both the bears and bulls in the headlines today, although the fact the CSI 300 is down 2.1% shows one camp is clearly in control. The Chinese market is all over the place of late, which is a clear reflection of the diverging opinions, but also the ever-contradicting barrage of news flow from different officials and researchers.

Yesterday we saw huge gains across Chinese stocks listed on the mainland and in Hong Kong, but today these names are being belted. You can add Wang Jian’s (researcher at the National Development and Reform Commission’s China Society of Macroeconomics ) to this list after he said Q4 growth may be less than 7% because of ‘big’ structural changes, while also adding that growth could be less than 6% in a ‘certain quarter’. We’ve also heard today that certain government agencies have been banned from constructing new buildings for five years, with the idea to use this money to develop the economy and improve public welfare.

Of course the big news has been around the terrible HSBC manufacturing PMI print, which at 47.8 was the lowest in eleven months. Forward indicators don’t look too flash either, but it’s important to remember the HSBC print looks at a sample survey of 400 companies; thus we feel this weak print needs to be complimented by the official print (August 1) which looks at around 3000 businesses. However, while the survey sample is small, it focuses on smaller companies which are the life blood of China, and this print is certainly not good news and will keep a lid on any rallies in AUD, copper and other industrial metals.

On the subject of the AUD it has been crazy, if not impossible today trading the unit, with AUD/USD subject to wild price action. Of course the key release was the Australian Q2 CPI print, with many of the belief this could give the green light to the RBA to cut at the August meeting. The swaps market was pricing in a 62% chance of a cut just prior, and this probability of a cut fell 10 percentage points to 52% after the market fully saw the raft of CPI metrics. However the important print is the trimmed mean (as it is the RBA’s preferred measure) and with the year-on-year print coming out at 2.2% it was just above expectations, although still at the bottom of the RBA’s own range.

Once again if you had the view that the bank was going to ease in August, you probably haven’t changed your call. Looking at price action, AUD/USD initially fell to 0.9244, rallied to 0.9319 and then got smacked to 0.9247 after the Chinese data. We have been looking to play the range on the pair in the short term and would look to sell around 0.9380 to 0.9400.

The ASX 200 actually started falling after the CPI print, with consumer names and interestingly materials names under pressure, and the falls accelerated with the weak HSBC print. Japan is struggling, with the Nikkei down 0.4%, and once again USD/JPY seems a little lost with the pair trading a range of 99.39 to 99.80. We’ve been look at longs from 99.00 and it’s certainly frustrating to hold this stance at present.

So, despite weaker Chinese markets, Europe looks set for a modestly higher open. The key release will be the suite of services and manufacturing PMI out of Europe. As things stand the market expects improvement in both services and manufacturing numbers, and it will be especially interesting to look at the German results, with the index having risen from 43 in December to likely be 49.2. Good numbers here should see EUR/USD pushing up to 1.33, and while we have been bearish on EUR/USD for some time, the technicals certainly aren’t backing this fundamental view; the pair actually looks quite constructive. It’s interesting to look at the ever contracting balance sheet of the ECB, while Spain is also improving, having seen reasonable job creation in May and June (the best in some seven years), while it now sees a current account surplus and less excess in the housing market.

We still stand by our longer-term bearish call and look to sell rallies given the like hood of forward guidance amid a backdrop of Fed tapering, but clearly short EUR/USD has been a tough trade of late. On the earnings front Daimler will be in play, although the bigger focus will be on Glaxo, especially with its 4.8% weight on the FTSE.

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