Tis the season to be earning

US earnings season is well under way and, as ever, the earnings are well ahead of pessimistic estimates.

US earnings
Source: Bloomberg

Only 31 companies have reported so far, so it’s a small sample. However, those 31 are smashing predicted numbers and sector-wise there are extraordinary beats on consensus:

  • 73% of the companies that have reported earnings so far have surprised to the upside; 56% have surprised to the upside on the sales line.
  • Earnings growth has contracted 1% this season but earnings estimates for the current earning period were for a 4-to-4.5% decline on fears the ever-increasing USD will impact earnings. Considering 62% of US corporates derive earrings offshore, that is understandable, but clearly estimates were way too pessimistic.
  • US bank earnings are well ahead of expectations. Morgan Stanley saw both the revenue and EPS lines topping even the most optimistic of estimates. Citi and JP Morgan were both well above their respective estimate bands.
  • Tech stocks are all the talk of the Street (and the world) as Google and Netflix not only beat estimates but were not even in the same percentile of expectations. Seeing a company like Google, which is worth $468.9 billion (equivalent to 4.5 CBAs), jumping 16% is something you just don’t see.

The talk of the impact from the USD has clearly been overstated for this quarterly earnings season. But the USD is clearly back in vogue.

The commodities block in CAD, AUD and NZD are seeing sustained selling against the greenback while the EUR has returned to its place as the funding source for US investment. I’ll be staying long the USD as it appears to be heading in one direction only.

However, what is clearly catching market watchers’ eyes is the front end of the US yield curve.

Since Greece left the front pages, US treasury yields have been on rise and have only increased in velocity since Janet Yellen’s testimony last week. Yield movements clearly signalled the market was short the idea of Fed lift-off in September.

Here are the moves that matter:

  • 3-month bonds are out of negative rates, up 3 basis points to 0.02% in a month
  • 6-month bonds are up 8 basis points in a month to 0.13%
  • 12-month bonds are only up 6 basis points in the last four weeks to 0.28%

Clearly September was being discounted as macro clouds in Greece and China skewed views on the near-term outlook.

Fed rate hikes will be the macro event of the year and the market is having to scrabble to reinstate positions it was gearing up for before Greece and China.

September will be one of the most interesting trading months of the year. If the Fed holds off, there will be high levels of speculation as to when in the final quarter of the year it will raise rates.

If September signals lift-off, the speculation will turn to the possibility of a second movement in the target rate before Christmas. In short, I suspect good levels of volatility to close off 2015 and it will be triggered by a singular event in September.

Ahead of the Australian open

We are currently calling the ASX up again to 5702 – up 22 points. For this to happen, clearly the banks are going to provide the leg up as BHP’s ADR is pointing down 1.6% and gold lost a further 1.1% overnight.

It would be the first six-day rally since 21 January. Back then the ASX had a 12-day run – something it hadn’t done since 2009. It’s clearly a covering rally ahead of earnings season; the strength has been solid and estimates have been revised up over the last week. I only hope this isn’t a textbook ASX earnings season trading trend of buying the rumour and selling the fact.

As I mentioned yesterday, there is clearly no reason to buy gold. The events in the US will only increase this reasoning and the breakdown in the price yesterday may signal a sustained selling period.

The gold sector was decimated yesterday and, if another massive fund drops 5 tonnes of Au into the Shanghai market again today, you know US$1000oz is where gold will be in the next few weeks.

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