Stars align for US equities

The stars continue to align for equities with US markets showing further signs that the worst is behind us.

Source: Bloomberg

Global markets extended their gains as investors responded positively to China data, a positive start to US earnings and Janet Yellen’s testimony. In day two of her testimony, Janet Yellen managed a fairly balanced approach and in fact aired on the side of caution as far as the recovery was concerned. On the earnings front, Intel was the most impressive and focus will remain on tech giants today with Google and IBM reporting.

Google report in tonight’s post-market session and traders are expecting to see Q2 EPS of $6.26 on revenue to $12.33 billion. Despite Google being such a quality business they have missed EPS expectations in five of the last eight quarters. IBM has a 7.6% weight on the Dow and interestingly hasn’t met or beaten EPS in seven of the last eight quarters. While we saw a further appreciation in US equities, the momentum hasn’t quite filtered through to all of Asia as we are currently seeing mixed performances.

ASX 200 rallies to a six year high

The ASX 200 has been a standout, surging to a fresh six year high triggered by a strong recovery in the materials plays. After a fairly muted reaction to China’s data yesterday, we had lift-off in the local market today rallying to the highest since June 2008.

All the big miners are firing on all cylinders helped by some positive production reports. Comments by BHP’s CEO Mckenzie suggesting China will produce less and less domestic iron ore as Australia expands its lower cost output also seem to have helped sentiment. Woodside Petroleum and Mount Gibson iron were the main production reports today and both stocks managed to impress.

Today’s reports have triggered some key technical moves with WPL looking like it’s on its way to finally close the gap from last month when the Shell deal took place. Having broken through $42 there is a good chance WPL will trade back to $43 in the near term and completely close that gap. FMG is also on the verge of breaking above a downtrend which has been in place on the daily chart since February. A close above $4.70 will be key for FMG to confirm a break of the downtrend.  

Euro looking vulnerable

Looking ahead to the European session, we are calling the major bourses mildly weaker. Of course yesterday was a big day for European markets and a pullback is not much of a surprise. However, momentum seems positive at the moment and with the euro finally giving up its grip on the 1.3600 level against the greenback, this could be a bit of a positive for equities.

The ECB has long expressed concerns about the exchange rate and this weakness is exactly what they would have wanted to see following their recent measures. The ECB’s Nowotny said the central bank sees dangers of side effects from low rates and this seems to have mounted pressure on the currency. The region’s CPI data is due out later today and could give some direction for the pair. However this is a revision of a prior estimate and not expected to change for 0.5%. Should we get a disappointing figure I wouldn’t be surprised to see the 1.3500 support being tested again in the near term.

There has been a downtrend at play since the pair topped out just shy of 1.4000 in May which has capped prices on a number of occasions this month. Any moves back into this downtrend are likely to be used as an opportunity for fresh selling. At the same time, a break below 1.3500 is likely to signal further near term weakness.

There is quite a bit of activity on the USD side of the equation with building permits, unemployment claims, housing starts and the Philly fed manufacturing index on the calendar. Should the momentum in US economic data continue, we could be in for further USD strength.

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