Positive Earnings Boost S&P500 To New All-Time Highs, Commodity Prices Weaker, ASX SPI200 Futures Up 1 Point Ahead Of RBA Minutes

The S&P500 closed at a new all-time high on Monday with earnings season well underway. 90 S&P500 companies are due to report second quarter earnings this week and with expectations of a 5.5-6% decrease from quarter one it's not too hard to imagine the index to continue pushing to new all-time highs should companies exceed the low expectations set for them.

The big names reporting overnight were bank of America Corp which gained 3.6% in after-hours trading following better than expected earnings per share of US$0.36 vs US$0.33 as a result of cost cutting as profit fell US$4.23b down 18% from quarter one. IBM rose 3.1% after the close of trading as revenue topped expectations of US$20.1b vs US$20.2b and adjusted earnings per share increased to US$2.95 against forecasts of US$2.89. IBM has shifted towards a cloud-based software and services focus and it appears to be paying off with the boost in revenue derived from its Watson artificial intelligence platform. 

Meanwhile technology giant Netflix declined as much as 17% in after-hours trading despite a 28% increase in sales and earnings per share as subscriptions both domestically and internationally fell short of forecasts. Year on year sales increased to US$2.11b and earnings per share increased to US$0.09 from US$0.06. Forecasts for quarter three were lowered with EPS revised from US$0.07 to US$0.05 with expectations of 2.3m new subscribers.

Both the S&P500 & Nasdaq100 gained +0.24% & 0.65% while the U.S. dollar was relatively flat, down -0.06%, the chart below shows the S&P500 which is at all-time highs following a volatile year of trading sideways. Both WTI & Brent crude declined -1.55% & -1.30% respectively as any potential supply interruptions of Russian oil through Turkey subsided, this dragged commodity prices broadly lower in sympathy with natural gas -1.23% weaker and iron ore -2.67% while copper finished relatively flat, up +0.16%. With the S&P500 is at new all-time highs demand for safe haven assets spot gold & silver continues to drift lower with prices declining -0.64% & -0.88% respectively, the second chart below highlights the price of both precious metals drifting lower following recent highs in early July.

European equity markets were mixed on Monday, the FTSE100 & Euro Stoxx 600 up +0.39% & +0.23% while the DAX30 finished relatively unchanged, down -0.04%, the Euro and Pound also gained +0.36% & +0.47%.

Following the initial volatility in the immediate aftermath of the U.K.'s decision to leave the European Union markets have been rallying based on the assumption that central banks will intervene with further stimulus, monetary and fiscal stimulus expectations from Japan, the quick resolution to the U.K. leadership after the resignation of David Cameron while the U.S. seems to be in a "goldilocks" state with new all-time highs as the economy improves but not by enough to warrant a rate hike.

As an investors it's fantastic to see the market doing so well, particularly after a wild start to 2016 that priced in so much pessimism and an impressive rally following Brexit which came as a surprise to myself and many other analysts. However it is important to be aware there are still many events that have the potential to increase volatility throughout the second half of 2016 and early 2017. These include the U.S. presidential race, the ongoing EU migration crisis, German & French elections, Italian banking crisis as well as Brexit negotiations which are yet to begin and it's easy to foresee clashes between the U.K. and EU over access to the single market while restricting the free movement of people. To clarify my view is not one of pessimism but cautious optimism.

Locally the ASX200 finished +0.53% higher while the market looks set to open flat this morning with ASX SPI200 futures up 1 point in overnight trading. Minutes from the RBA's meeting in July will be released at 11:30am Sydney time which may determine how the market trades today.

Data releases:

·         RBA Minutes (July) 11:30am AEST

·         NZ Dairy Auction 2:00pm AEST

·         U.K. CPI (MoM & YoY Jun) 6:30pm AEST

·         German & EU Zew Economic Sentiment Survey 7:00pm AEST

·         U.S. Housing Starts (MoM Jun) 10:30pm AEST

Chart 1 – S&P500 Index

Chart 2 – XAUUSD (Spot Gold) and XAGUSD (Spot Silver)

Source: Rivkin, Bloomberg

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This article was written by James Woods – Global Investment Analyst, Rivkin Securities Pty Ltd. Enquiries can be made via info@rivkin.com.au or by phoning +612 8302 3600.