Originally published by Rivkin
U.S. treasuries and equity markets declined on Wednesday as investors assessed a number of quarter three earnings reports and a raft of economic data. The biggest focus for earnings was Apple Inc (NASDAQ:AAPL). which declined -2.25% in regular trading despite forecasting slightly higher sales for the fourth quarter. Analyst estimates were for revenue forecasts of US$75.4 billion in Q4 with Apple predicting sales between US$76-78 billion. It seems the market was clearly expecting higher forecasts as Apple benefits from recent issues experienced by Samsung (KS:005930) related to Galaxy Note 7 users.
Data overnight also showed signs the U.S. economy continues to improve, the advance goods trade balance (MoM Sep) decreasing to –US$56.1 billion from –US$59.2 billion in August and estimates for an increase to –US$60.5 billion. Markit services PMI (MoM Oct) rose to 54.8 from 52.3 previously and forecasts of 52.3. The report was mostly upbeat suggesting momentum is gaining in the services sector with respondents citing improved economic conditions and signs of business investment. Taken with the stronger manufacturing PMI earlier this week it signals strong growth for the fourth quarter.
U.S. new home sales (MoM Sep) unexpectedly increased to +3.1% with calls for a decline of -3.1% on a seasonally adjusted basis. Month to month figures can be quite volatile, while the report by the commerce department showed sales increased by almost 30% when compared with a year earlier. The disappointment for the day was wholesale inventories (MoM Sep) which increased +0.2% from -0.2% previously and calls for only +0.1%. Inventories are an inverse indicator for consumer demand, with declines suggesting increased demand by consumers and vice versa. Later this week we will have an advanced estimates of third quarter GDP, forecasts are for a gain to +2.5% from +1.4% although with the recent improvement in data we would see the reading top estimates.
U.S. bond yields rose as the better data adds weight to the view the Fed will hike rates at its December meeting. Two-year yields increased +1.6 basis points to +0.8724% as did the ten-year yield up +3.4 basis points to +1.7931%. Despite this the U.S. dollar index was modestly weaker, down -0.05% as the Euro which has the largest weighting in this index rose +0.29%. Equities were modestly lower, the S&P 500 & Nasdaq 100 finishing trading -0.17% & -0.62% weaker respectively.39% of all S&P500 companies have now reported, with 75% surpassing earnings estimates and 61% beating revenue forecasts.
Across to Europe there was little in the way of data, with the only release of note being the German GfK consumer confidence survey which missed expectations. The measure was forecast to remain unchanged at 10 however it decrease to 9.7 as income expectations and propensity to buy decreased although the report notes a pickup in economic prospects after three consecutive declines. Equity markets were broadly lower with the Euro Stoxx 600 & DAX trading -0.38% & -0.44%.
Oil prices extended recent losses, reversing initial gains shown on the second chart below, despite an unexpected draw in U.S. crude oil inventories for October 21st. Estimates were for an increase of around 2 million barrels however government data showed a decline of -553,000. Prices for the next month prior to an OPEC meeting in Vienna is likely to be dominated by headlines. A particular focus will be around the difficulties the group faces in actually formalising an agreement to cut production by around 700,000 barrels a day. So far Iran, Libya and Nigeria are going to be exempt from these output cuts as they have faced unusual circumstances that reduced output.
Interestingly Iraq which is OPEC’s second largest producer has also been making statements that it too should be exempt as it needs the funds to combat ISIS. There is also a disagreement over what Iraq’s actual production figures are, this is important as this will be used as the basis for allocating cuts. Iraq suggests its output is currently 4.774 million barrels per day, while OPEC’s secondary sources place production around 4.445 million barrels per day. If Iraq’s actual production is around 4.5 million barrels and they are able to convince OPEC to use 4.7 then they will effectively freeze their output rather than reduce.
This goes to highlight the difficulty OPEC will have in implementing these production cuts and as history has shown that countries will often exceed production targets. Price gains towards US$55-60 will see more high cost supply come back on the market and that is likely to limit prices in the near-term so it’s difficult to feel bullish about prices. While OPEC will need to do significantly more in terms of reducing production to help rebalance the market, it is at least taking steps in the right direction and if they can successfully implement these changes in late November it would further add to this view.
Australian inflation figures surpassed estimates on Wednesday adding weight to the view the Reserve Bank of Australia is likely to hold off adjusting their monetary policy stance for the remainder of 2016. Year-on-year to September prices increased +1.3% from +1.0% earlier and forecasts for +1.1% while quarter-on-quarter prices increased +0.7% from +0.4% previously and estimates of +0.5%. In response two-year government bond yields rose +3 basis points to +1.703% while the ten-year yield was relatively unchanged at +2.277%.
The second chart below shows the Australian dollar which initially gained as much as +0.86% before reversing to close relatively unchanged around 0.7646. The S&P/ASX 200 closed decisively weaker down -1.53% meanwhile we can expected a slightly stronger start to trading this morning with ASX SPI200 futures up 8 points in overnight trading.
Data releases:
- U.K. GDP (QoQ & YoY Q3) 7:30pm AEDT
- U.S. Durable Goods Orders (MoM Sep) 11:30pm AEDT
- U.S. Continuing & Initial Jobless Claims (Oct 15 & 22) 11:30pm AEDT
- U.S. Pending Home Sales (YoY Sep) 1:00am AEDT
This article was written by James Woods - Global Investment Analyst, Rivkin Securities Pty Ltd.