Apple and Microsoft push US futures lower

As goes Apple, as goes the US stock market. So, unless we see something spectacular from European markets, we should see a modestly risk-off session in the US.

US futures
Source: Bloomberg

When you see Apple fall 6.9% and Microsoft 4% in the post-market, you knew NASDAQ futures especially would struggle (currently -1.2%). Dow and S&P futures are down more modestly.

Apple’s result have certainly had traders asking ‘were they that bad?’ 56% of our order flow in the post-market on Apple has been to initiate short positions. So,, despite the strong move, the views from traders have been nuanced and two-way. This makes sense, as the results were strong and on 13.5 times forward earnings, it is hardly an over-demanding valuation. However, some in the market are clearly disappointed by the Q4 guidance and others have been questioning whether we can see further growth in iPhone sales. I feel this is still a stock traders will be happy to buy on pullbacks, but I’d like to see stability in the price action before buying, as the cash open promises to see a fall on par with the January 2014 quarterly report when Apple fell 8%.

It’s interesting, as well, to see the knock-on effect on Asian stocks as the supply chain for Apple is huge. By way of example, Hong Kong-listed AAC Technology Holdings has dropped 6.7% today. There is weakness in other names in Hong Kong, Taiwan and China.

Taking a step back, the statistics around US earnings season paint a rosy picture with 73% of S&P firms who have reported having beaten Wall Street’s EPS forecasts, while 55% have beaten on sales. This doesn’t always highlight the true picture, as we have seen with names such as Apple and Morgan Stanley, you can beat expectations and the stock can still fall on the day. Naturally, there is much more for traders to look at in a result. Boeing, American Express and Newmont report in upcoming trade.

Elsewhere around the region, there is modest risk-off feel, although this is reflecting the falls in US futures and Asia pricing in what is likely to be a poor open in the cash market. It has effectively given traders licence to take profits in a number of sectors that have shown good leadership, such as Aussie banks and healthcare. The broader ASX 200 found support in early trade at Monday’s intra-day low of 5,651 but has since broken through the low and there are broad-based sector losses. Resource stocks were holding on and seeing outperformance, but have since given up and fallen for the fifth day in a row. BHP’s Q415 production was good enough, but there is some belief that 2016 guidance in copper, coal and petroleum was somewhat weaker than forecast.

Interestingly, the level of companies where over 70% (or the consensus) of sell-side analysts have ‘buy’ recommendations on ASX-listed stocks has increased to the highest level of the year at 31%. This suggest that stocks have better upside relative to consensus price targets and is presumably a function of consensus earnings estimates being revised up 5% since 22 May.

Those hoping for a clear sign the Reserve Bank is set to join the Bank of Canada and Reserve of New Zealand (tomorrow) in cutting rates to 1.75% in the future will be somewhat disappointed today. The Q2 trimmed mean inflation print came in ten basis above forecast at 2.2% and modestly in line with the RBA’s own forecasts. RBA governor Glenn Steven’s then spoke shortly after at a luncheon in Sydney and put the idea of a rate cut firmly on the table. The AUD responded hitting a low of $0.7373, although the pair was already falling into the comments as Aussie three-year treasury yields dropped a few ticks. Interest rate expectations haven’t increased too much though and looking at the 30-day interbank market there is still only a 28% chance of a move lower into September and 69% into December. There is still much water to flow under the bridge before we see a move into 1.75%, but the Reserve Bank governor is trying to keep a lid on rallies in the currency and this is smart. As he pointed out in the Q&A session, the central bank ‘has the balance right on rates at the moment’.

Turning to the European open and as previously detailed its looks as though there will be red on screen. Most of the attention will be on US earnings, but there is plenty to key UK/Euro traders on their toes as well, with ARM Holdings, Easyjet and Danske bank reporting numbers themselves. The BoE will release minutes from the 9 July meeting and it’s interesting to see that interest rate hike expectations have come out of the short sterling strip. Pricing around the December contract has struggled to break the 77 basis point level and sterling bulls will clearly be hoping today’s minutes can see that materialise.

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