Short-lived relief on Wall Street, high yielding currencies decline

Summary:

• Stocks on Wall Street moved higher on Thursday but SP500 futures trade well into a negative territory this morning

• Chinese yuan’s weakness spooks investors in Asia adding to pressure coming from tighter monetary conditions

• High yielding currencies drift lower along with crude prices, gold stable and US dollar stable

After one day of significant rises on Wall Street optimis basically evaporated as the SP500 futures are trading 0.7% down this morning. Thursday’s session brought relief to stocks investors after the heavy slump seen the day before yesterday. As a result, the SP500 (US500) ended the day with a 1.9% gain, the Dow Jones (US30) rose 1.6% while the NASDAQ (US100) surged as much as 2.9%. However, this story quickly changed after the final bell when such companies as Amazon, Intel and Alphabet releases their earnings.

Stocks listed on the SP500 have reacted quite poorly to surprises in earnings. Source: Bloomberg

Beginning with the first mentioned stock let’s say that Amazon’s net profit totalled as much as $5.75 per share smashing the median estimate of $3.14. Nevertheless, net sales increased less than forecast bringing the value of $56.6 billion compared to the consensus of $57.1 billion. Even as the company was able to make a 29% increase on a yearly basis, investors did not think in this way. In effect the stock crashed over 7% in extended trading. The company sees its revenue rising 10-20% in the last quarter. In case of Intel we got a 39% pick-up in net profit per share growing to $1.4 and easily beating the consensus of $1.15. Sales increased 19% to $19.2 billion and also exceeded analysts’ expectations of $18.1 billion. The company predicts that its EPS will be $1.22 on revenue of $19 billion in the final three months of the year. Finally Alphabet’s earnings grew more than 36% ro $13.1 per share on revenue of $33.7 billion (it means more than a 20% year-over-year rise). Analysts had expected EPS of $10.4 and revenue of $34 billion (it means much lower net profit margin). Investors focused on a slight miss in revenue in anticipating the future for the company and as a result the stock slid roughly 4% in after-hours trading. As we presented in the chart above even as most of companies in the US have beaten expectations when it comes to earnings, price reactions have been rather downbeat so far.

SP500 bulls could be offered the ominous candlestick when the market closes today unless there is a massive surge at the end of today’s session. Source: xStation5

In turn, investors in Asia were spooked today by the sharply weakening offshore yuan jumping to above 6.9750 from 6.9550 with the PBoC’s reference rate for the USDCNY set at the highest since January 2017. The Shanghai Composite is declining 0.5% while the Hang Seng (CHNComp) is dropping 1.3% as of 6:41 am BST. At the same time the Japanese NIKKEI (JAP225) is extending its yesterday’s massive slump and it is trading 0.7% lower shortly before the close. It is worth mentioning that Reuters reported earlier today that China was considering further tax cuts and potential VAT adjustment (possibly in seeking to support for its domestic stock market). Let us remind that the authorities in Beijing have already implemented an array of stimulatory measures both from fiscal and monetary policy.

The AUDUSD failed to break through the blue trend line and as a result it reversed. From this point of view it does not look well for bulls. The first level when they seek (at least in theory) some support is placed at 0.6840. Source: xStation5

On the currency front we are seeing a sell-off in high yielding currencies such as AUD and NZD, the first is falling 0.7% while the latter is trading 0.8% down. The euro is quite muted at the time of writing hovering around 1.1370. In response to adverse moves across stock markets the US 10Y yield is drifting lower this morning and it is trading slightly below 3.1%.

In the other news:

• Gold prices trade around $1232 showing no nervous moves at all, oil prices fall roughly 1% in early European trading

• Tokyo CPI rose to 1.5% from 1.3%, core CPI (ex. fresh food) stabilised at 1%

• Fed’s Mester sees the current market drop “nowhere near harming the US economy”

• Some BoJ’s officials are said to limit gains in the 10Y yield beyond 0.2%, according to Bloomberg