Lowball Games

Alcoa's outperform sets the stage for a procession of good Q2 earnings results, and a return to risk-on sentiment in the coming weeks. New highs in equity indices, higher commodity prices and an Aussie bounce are all highly likely.

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Alcoa and Earnings

Alcoa (AA) reported Q2 adjusted EPS of $0.07 (USD $76million) after equity market close on Monday, up from $0.06 in 2012. The consensus estimate was for EPS of $0.06. The stock rose 0.3% on 1.7 million shares traded, closing at $7.92. Typically, huge multinational businesses like Alcoa would be regarded as a true bellwether for the rest of the US economy. However, due to contraction of the aluminium industry and supressed prices, Alcoa’s results are no longer a proxy for economic growth. Alcoa’s stock price has fallen more than 10% over the past 12 months, compared to the Dow which has risen 18% over the same time.

The important aspect of the Alcoa’s results is not numerical but psychological. Alcoa’s results clearly demonstrate the way a collusive financial industry works together in order to pre-set estimates, for the purpose of positive market reaction. Alcoa was expected to earn 6 cents in Q2. But only last week the estimate was 9 cents. A month ago, 11 cents. Three months ago, 14 cents. In January 2013, 17 cents. 1 year ago, 30 cents. And back in January 2011, frothy investment bank analysts were expecting 70 cents. In a paradoxical turn of events (increasingly common in today’s dysfunctional marketplace) it seems that the harsher the reduction in estimates prior to earnings announcement, the better the surprise. And everyone loves surprises after all. What isn’t surprising is how clandestine market support mechanisms are being used in every arena.

Source: Bloomberg, ZeroHedge

Source: Bloomberg, ZeroHedge

Alcoa is a benchmark for things to come in the trading arena, more so than a reflection of macro-economic conditions. Regardless of how Alcoa performed in Q2, it’s not primary or manufacturing sectors that truly matter for the U.S. economy, but finance. Results from major U.S. banks will call the tune in the coming weeks and affect everything. Equity indices, currencies, commodities, bonds and most importantly, sentiment are all likely to be swayed by how the market sees U.S. companies. The most heavily weighed (and thus most market sensitive) sector in the S&P is Finance followed by Technology so banking/insurance/technology results will matter more for investors and asset prices.

Also noteworthy is how accounting practices have become so complex and confusing that most companies now simply massage their results to suit whichever estimate is required. For example, Alcoa ‘excluded’ USD $244 million in restructuring charges where as if they included the charges, Net Income would have actually been a loss of USD $148 million, not an income of $76 million. Clearly investors don’t mind because the 6c estimate was beaten and speculative shorts were hard to find. Riding the gravy train is probably more enjoyable than analysing where the gravy came from.

Market Update

US Treasuries

After losing ground following last week’s 196k NFP, Treasuries corrected during the Asian session yesterday and extended gains in the US session overnight. Short covering helped Treasuries off their Friday lows but a light data calendar and this week’s supply are preventing a larger correction. All eyes are on the FOMC minutes due for release at 13:00 ET(wed) / 18:00 GMT(wed) / 4:00 AEST (Thu). Market volatility will be elevated as traders look for cues regarding the Fed’s plans on asset purchases.

Currencies

EUR/USD remains bearish and is prone to declines. Having fallen from its recent 1.34 high down to 1.2850, we’re still likely to see additional weakness because of the markets burgeoning realisation that Fed policy is significantly diverging from ECB policy which is helping short-dated yields to rise, pushing investors into USD positions against EUR.

USD/JPY is trading close to 101 once again and well clear of the recent lows thanks to the recovery in equity markets. Expect USD/JPY to be the most sensitive currency to US yields and the Q2 earnings season.

GBP/USD managed a modest rally but EUR/GBP is still propped above 0.8600, a key level where several daily highs from May are clustered. We expect substantial support between 0.8575-8.600.

EUR/CHF briefly overcame 1.24 despite solid Swiss production and jobs data suggesting that a strong CHF is not causing extensive problems for the Swiss economy and the SNB. Better risk appetite in Europe is underpinning the commodity currencies, although AUD traders are cautious ahead of Australian jobs data made public on Wednesday. NZD has been the standout performer so far this week and maintains to hold onto ground against USD. CAD continues to slip despite better than expected housing data primarily due to resolute USD demand.

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Commissioned by Think Forex

Written by George Tchetvertakov

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