The Importance of Beating Earnings II: Estimates Are Exceeded, Markets Up Tuesday, Early Wednesday GMT
(As of approximately 11:00 GMT Monday, 7:00 am EST)
Summary
Stocks were up on positive earnings news from big name firms, commodities follow.Increasing risk appetite favors higher yielding and commodity currenciesEarnings are the big news this week, so markets await coming announcements
Introduction
As we've stated repeatedly in these pages, it's clear that results from the financial sector have the potential to move the markets. Earnings surprises from the banks began the March 3rd rally, and it is difficult to conceive of continued advances in the markets without more of the same in the Q2 reporting. Goldman Sachs already delivered yesterday by solidly beating consensus expectations, yet the news proved anticlimactic given the advance report from the NY Times, and the S&P rose only modestly.
Among the heavyweights we'll hear from tomorrow and Friday include (banks in boldface):JPMorgan Chase (16th), Google (July 16), IBM (16th), Bank of America (17th), Citigroup (17th) and General Electric (17th).
Stock Indexes
On Tuesday Asian markets were up strongly on growth optimism, Singapore upwardly revised forecast, Europe followed through and was up about 1%, and the US up about 0.5%, on light volume. In early Wednesday trading, Asia closed up 0.16%(N225) – 1.5%+ (Hand Seng, Straits Times), and the major European indexes are also up as of this writing.
In Britain, unemployment increased by only 23K, far less than the 41K expected. In addition, recently Britain reported improvements in housing prices and retail sales, suggesting that the worst may indeed be over for the UK. Given this news plus the positive start to the Q2 US earnings reporting, the FTSE has responded, along with the other major European indexes so far today, with its third straight solid increase.
Thus stocks have virtually recovered the lost ground since the July 2nd non-farms payroll report, despite any evidence of an improving situation for the US consumer, on whom most US firms will ultimately depend. But why spoil the fun with such thinking? In the end, the value of stocks reflects the underlying earnings prospects of the business in the relatively short term, not do not always necessarily reflect the health of the underlying economy.
Index traders should keep a careful eye on earnings calendars for clues about how the given indexes will move, especially the S&P. There are many easily available online for free, for example at Yahoo! Finance: http://biz.yahoo.com/research/earncal/today.html
Currencies
Because fear, aka "risk-appetite" has been the prime driver of currency prices, and stocks, especially the S&P, have given the clearest, simplest picture of the market's mood, currencies have generally tracked stocks. That is, when stocks move up as they did yesterday, higher yielding currencies (AUD, NZD) favored by risk-seeking carry traders have gone up, while safe-haven currencies (JPY, USD, CHF) have gone down.
Understand that point, and you have a good idea of what happened Tuesday. Look at a chart of almost any currency pair in which there is a meaningful difference in yield, and the higher yielder gained. There are exceptions to this idea, of course. For example the EUR central bank rate is twice that of the GBP, yet the EUR dropped against the GBP on Tuesday (however, it is recovering somewhat as of this writing on Wednesday).
Overall, however, most higher yield currencies have tracked stocks and have traded in tight horizontal ranges, reflecting the same uncertainty ahead of major Q2 earnings announcements, but moving up yesterday along with the markets. Safe haven currencies like the JPY, USD, and CHF have generally moved in the opposite direction of stocks and other risk assets like commodities. Thus these were mostly down yesterday.
Note, however, that if there is no yield difference, then other factors come into play. For example, the USD/CAD has hit a 3 week low as the CAD surged against most currencies, despite the lack of any news to support such a move, except for the CAD's tendency to move with US stocks.
Sometimes, however, currencies with the same yield just stay in a tight range, as we've been seeing with the USD/CHF.
Thus traders have the chance to either play currency in horizontal ranges like the USD/CHF, or play to trade a pair that is in a clear trend over the past few days, like the USD/JPY.
As noted above, since currencies are moving with stocks, short term traders and news traders should keep a careful eye on the earnings announcement calendar for the coming days to be prepared for moves leading up to and following the "big name" announcements. For example, July 16 will feature earnings from Google, IBM, and JPMorgan Chase.
Commodities
As risk assets, commodities have tracked the general movements of the stock markets too, some with more volatility, some with less. Thus they moved up yesterday, and are likely to continue to track moves in stocks. Given crude's recent volatility, it can at times be a better play on stock market moves than trading the stock indexes themselves, since it has at times exaggerated stock market moves, offering greater profit potential. Also influencing crude today will be the EIA's weekly inventory report. Yesterday's API report showed inventories falling, but crude rose only minimally.
Surprisingly, gold has had bigger moves over the past few days than oil, rising from a low of around $907 to almost $930, an over 2% move, as rising CPI in Britain and the US, along with rising stocks and a falling dollar, has bounced gold off of its 2 month low. Next likely major resistance is around $940.
Conclusion
Whatever happens, this week is likely to hammer home the lesson of the above title: the Importance of Beating Earnings Estimates, because the success or failure of the leading firms and banks to do could well be the catalyst for the next multi-month market trend.
Disclaimer: Opinions herein stated do not necessarily reflect those of AVAFX, and the author may have positions in the instruments mentioned.
Disclosure: The author may have positions in the above instruments
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