The Day Ahead: Stocks Off as Q4 Earnings Get Underway

The Q4 earnings session began on the wrong foot after the closing bell yesterday as Alcoa reported a worse than anticipated loss of $277 million. This morning equity futures are sharply lower, in part because of Alcoa but also in reaction to news from China that bank reserve requirements have been raised 50 basis points to 16%, which will constrain liquidity.

“In addition, China sold one-year bills at a higher yield, pointing to potential interest rate hikes,” explained analysts at BMO Capital Markets. “The tightening came somewhat earlier than most had predicted. Chinese authorities appear to have been spooked by the massive lending ― 100 bln yuan per day ― in the first week of the year. This is a shot across the bow of lenders to slow things down a bit.”

Two hours before the opening bell, Dow Futures are off 60 points to 10,544 and S&P 500 futures are 7.0 points lower to 1,135.50. Weakness is also seen in commodities: WTI Crude oil is trading 74 cents lower to $81.78 per barrel and Spot Gold is down $4.63 to $1147.22 per ounce.

With risk clearly off the table this morning the US dollar is broadly stronger though not against the yen. The euro is down .34 cents to $1.4479 but against the yen the greenback is down .35 points to 91.74.

Key Events Today:

8:30 ― The monthly deficit in the Trade Balance is expected to widen in November. Exports are expected to pick as a global recovery takes advantage of the cheap US dollar but imports are set to rise more rapidly on account of rising domestic demand and more expensive oil. The consensus is for the deficit to be $35.0 billion in the month, a 6.4% bigger than the $32.9 billion gap in October.

“We expect that export growth cooled in November, bringing it closer to what we would consider its underlying trend,” said analysts from Nomura Global Economics. Import growth, in contrast, was quite soft in last month's report and is expected to accelerate. “Looking ahead, we expect the trade balance to be about unchanged over the next several months as strengthening import demand offsets the effect of stronger foreign growth on exports.”

Analysts from IHS Global Insight, who look for a $37 billion deficit, said September and October “both saw exceptionally rapid increases in exports, and though we don't doubt that the export surge has further to run, we suspect that there will be a pause in November.” They added, “we expect imports to move higher, partly because of higher oil prices, and partly because U.S. firms are now looking to rebuild their inventories.”

• Treasury Auctions:
• 11:30 ― 4-Week Bills
• 11:30 ― 52-Week Bills
• 11:30 ― 3-Year Notes