Equity markets around the world have been dropping today in response to disappointing earnings from Alcoa and a profit warning from Electronic Arts. Indices had been rallying heading into earnings season and with confession season having been quiet, it appears that some overconfidence about earnings may have started to set in. Last night’s developments hit investors like a bucket of ice water, quickly cooling enthusiasm and providing a stern reminder that the economy is not out of the woods yet and that there remains a risk of negative surprises in the upcoming earnings season.
Although these developments may have cast a cloud over the markets and limited near-term upside, there were a number of positive news items such as better-than-expected holiday sales out of Tiffany (NYSE: TIF) and press reports suggesting that U.S. automakers may be getting ready to raise production and hire/recall workers that suggest the economy is still recovering, perhaps not as fast, however, as the market had hoped.
Indices that had broken out recently fell back below recent breakout points and could be moving back into the trading ranges that prevailed through most of the autumn. Having dropped back under 10,600, the Dow Industrials (US30 CFD) could see support near 10,500 or 10,200. The S&P 500 (SPX500 CFD) may find support near 1,120 or 1,100 having failed to overcome resistance at 1,150. The S&P/TMX 60 (Toronto60 CFD) appears to have slipped back into its 670-700 trading range.
Tonight, Asia Pacific markets could be vulnerable to follow-through momentum, particularly the Nikkei (Japan225 CFD), which has been testing 10,800 resistance with 10,550 support. The S&P/ASX 200 (Aussie200 CFD) turned lower from 5,000 resistance with support possible near 4,750 or 4,600 or 4,500. The Hang Seng (HongKong33 CFD) could retest 22,000 or 21,450, having failed to overcome another lower high near 22,600.
Commodities update: Crop report and Chinese monetary tightening crushes commodities
For the second time in two weeks, the People’s Bank of China has taken steps to tighten monetary policy, this time raising the bank reserve ratio by 50 bps and increasing yields on government debt again. Over the last year, anticipation of a strengthening Chinese economic recovery has played a key role in driving the recovery in economically sensitive commodities such as copper and crude oil. With some economies taking longer to recover, moves to rein in Chinese growth could weigh on the outlook for world commodity demand.
Copper has broken down below $3.40/lb support, although it continues to hold above the $3.30 level. U.S. crude has also come under pressure on this news, breaking down through $82.50/bbl support and falling into the $80-$81/bbl range.
The Chinese move, combined with a strengthening U.S. dollar has put the boots to precious metal prices today. Gold has dropped over $20/oz from just short of $1,160/oz resistance to test $1,125/oz support. Silver has fallen from $18.80 resistance through $18.50 support and bounced up off of $18.10/oz to stabilize near the $18.30 level.
Currency moves and today’s crop report have combined to land a devastating one-two punch on the grain sector today. The WASDE supply outlook for commodities suggested the potential for bumper production and the risk of surpluses as its forecasts for end stocks topped expectations for corn (1.76 billion bushels vs. Street 1.62 billion), soybeans (245 million bushels vs. Street 239 million) and wheat (976 million bushels vs. Street 925 million). On this news corn has dropped 7.1% below $4/bushel, soybeans are down 3.6% through $10/bushel and wheat has fallen 8.0%, but seems to be holding above $5/bushel after taking out $5.50.
On the other hand, natural gas appears to have stabilized near the $5.50/mmbtu level.
This commentary is based upon technical analysis. Technical analysis is the study of price and volume and the interpretation of trading patterns associated with such studies in an attempt to project future price movements. Technical analysis does not consider any of the fundamentals of an underlying company, and as such is inherently uncertain and should not be the only factor considered by an investor in making an investment decision.