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Earnings Start Slow, Move to Risk-Aversion!
By Mike Conlon | January 12, 2010
US corporate earnings season began yesterday after the close as Alcoa (AA) kicked off Q4 with a less-than-stellar report by missing analyst expectations by 5 cents. While this is only one company reporting, the market is fearing that this could be a harbinger of things to come. One of the important things to note is that Alcoa, an aluminum maker, cited higher metals costs and lack of demand for product as the impediments to growth. Higher costs, lack of demand.
As a result of this report, stock market and commodity futures have sold off and the Japanese yen (JPY) and the US dollar (USD) are showing strength this morning in what looks like a risk-aversion theme for the day. With commodity prices off, we are seeing the Aussie (AUD), Kiwi (NZD), and Loonie (CAD) showing the biggest losses.
One of the problems with this earnings report out of Alcoa is that it is hinting that recovery from recession may not be as robust as traders (and government) had hoped. Much of the “good earnings” from last year were due to mass lay-offs and cost-cutting and NOT due to growth. Combined with the massive government stimulus programs that may or may not have been effective in doing anything, the stock market could be in for a near-term correction.
Should this occur, then I would expect strength in the risk-aversion currencies and weakness in the commodity currencies and the Euro (EUR).
However, this is only ONE report out of many to come. Also to note is that traders will be focusing on this Friday’s US CPI data. Any significant rise in prices could put a Fed rate hike back into play and cause more equity selling and USD buying.
While I don’t expect Bernanke to due anything on the rates until at least the summer, this could prompt increased jaw-boning as he attempts to keep the dollar from total collapse. If the equity markets can come out of earnings season relatively in tact, then I expect risk-taking plays to be back on the table.
What we should expect is volatility in the markets, as traders push markets back and forth based on the “data du jour”. So I’m going to keep my trading short-term, but with a long-term bias toward risk-taking plays. This means I’ll be selling dollar rallies, and buying commodity dips.
Until I actually see something credible that would support a Fed rate-hike, I will keep this stance.
Short-term trading in range-bound markets can be extremely profitable and low risk– provided you know what you’re doing!!!
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