Halfway through earnings season

The overnight macro news centred on two key events. First is that Greece is likely to submit an extension request for up to six months on the ‘loan agreement’. The question is what scope a ‘loan agreement’ would take?

Source: Bloomberg

Second was the FOMC minutes. The debate around rising rates continues and there is a clear understanding from the board as a whole that raising rates too soon would likely stifle the current growth trajectories. This line clearly illustrates that fact: (many Fed officials are inclined) ‘toward keeping the federal funds rate at its effective lower bound for a longer time’.

However, some are clearly concerned as waiting too long would likely lead to rampant inflation. The debate was left there and the consensus from the market is the doves are in control at the FOMC.

We are now a touch over halfway through the earnings season. 53% of companies have now reported. Of those that have, 54.7% have beaten consensus on the earnings per share line. Only 41% have beaten expectations on the revenue line. What is more concerning is EPS has declined 12.3% on an aggregated basis compared to the previous period - aggregated revenue has fallen 49.5% on the same period last year.

Materials now lead the decline, with aggregated EPS falling 51% as the iron ore, copper, coal and other major commodities collapse. However, capital goods continue to show weakness with the space’s aggregated EPS declining 27% while industrials have moderated since the start of the season. They have still seen a 15.1% decline in EPS.

‘Below-trend growth’ is indeed a bottom-up phenomenon and the fact most corporates are moderating second-half estimates should see this trend continuing throughout FY15. However, in this low-rate, low-inflation, low-growth environment, return of capital remains king and explains why the ASX reached another new six-and-a-half year high on yield and above-inflation capital growth.

There remains an open question of what will happen when the US raises rates and the bond market unwinds, though. There are some rather large unknown variables building around the middle of the year.

Happy Chinese New Year

Today is Chinese New Year and that will see Chinese investors away from their desk for the next week as they usher in the Year of the Goat. This will mean volumes in Asia will be substantially lower than usual and may produce some variable trade as, along with mainland China, Singapore, Hong Kong, India, Malaysia, Korea and Taiwan are all closed.

Australia’s earnings season continues today and will be the major factor in the movements of the market, considering so many Asian nations are on holidays. We are calling the ASX down five points to 5910 based on the futures.

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