MARKETS SPECTATOR: A bundle of nerves

The market looks to have overreacted a bit following the latest Reserve Bank minutes, while nervousness creeps in ahead of US earnings due later tonight.

Judging by the S&P/ASX 200’s reaction to the latest monetary policy meeting minutes, it looks like the market was looking for a more dovish tone from the Reserve Bank.

Almost immediately following the 1130 AEDT release, the market came under pressure as the benchmark index retreated from 14-month highs of 4516.9 to be currently trading at 4492.3, a fall of 0.6 per cent.

It looks to be a bit of an overreaction and it’s a bit strange to see the market react so much to the minute’s release. At the end of the day, one would think that everything that is important from the latest meeting would have been released in the accompanying statement.

Does the market really think that the minutes are going to reveal a key discussion point or thematic that wasn’t considered important enough to include in the statement accompanying the decision? We highly doubt it. Yet, for some reason the market has been disappointed at this morning’s release.

And the interest rate futures market has reacted too. At 1000 AEDT, interest rate markets were pricing in an 86 per cent chance of a rate cut on Melbourne Cup day. Now that probability has fallen to 71 per cent, which would explain the retreat among equities.

Having said that, there could also be some nervousness creeping in ahead of earnings in the US tonight, which really ramp up.


Source – Bespoke Investment Group

The above table shows the list of the top 40 largest S&P 500 companies set to report earnings tonight. Interestingly, the six companies scheduled to report before the opening bell have a history of beating earnings per share estimates 81 per cent of the time and revenue a less impressive 68 per cent. So the odds are certainly in favour of the bulls at the open.

In comparison, the four companies due to report after the closing bell have a history of beating EPS estimates 80 per cent of the time and revenue 72 per cent of the time.


Source – Iress

Judging by the above performance table, it looks like Goldman Sachs has been priced for perfection and could find it hard to impress the market unless it absolutely smashes forecasts. Maybe a ‘buy the rumour, sell the fact’ situation will play out?

At the other end of the spectrum, the market looks to have set the expectations bar very low for Intel Corp, which could result in some upside should it report inline or stronger results.

So it’s going to be an interesting night indeed, with plenty of headlines for participants to sink their teeth into. History tells us that analysts are frequently too bearish when it comes to earnings season and hence, we remain of the view that results will surprise to the upside.


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