Stocks could trade a bit choppy Wednesday, as investors react to a tidal wave of earnings news and watch fluctuations in the dollar and other risk assets.
Wall Street had a blah day Tuesday, with the Dowending 50 points lower at 10,041 and the S&P 500 dipping 6 to 1091. While a handful of Dow components - Cokeand DuPontamong them - reported mostly better than expected profits, the market instead focused on disappointing revenues and weaker than expected housing starts. Caterpillar was a standout, jumping sharply on stunningly better earnings but softer revenues.
In the after hours, Yahoo added some excitement, with its stock trading higher after it reported better-than-expected earnings of $187 million or $0.13 per share, on weaker sales of $1.13 billion. Tech was the only one of the 10 S&P sectors Tuesday that gained, rising a fraction of a percent on Apple's good earnings news.
The Fed's beige book is the big economic news for markets Wednesday at 2 p.m., but there are also a bunch of major earnings before the bell, including Boeing, Wells Fargo, Morgan Stanley, Eli Lilly, Altria, AMR, Fiat, Freeport McMoran, US Bancorp, Northern Trust and Continental Airlines. After the bell, Amgen, EBay, Equifax, Citrix, Fidelity National, Lam Research, Noble, and Novellus report.
Earnings have been mostly a positive catalyst for the stock market this market. As of Tuesday afternoon, 96 S&P 500 companies had reported earnings and of those, 79 percent had better than expected earnings. Actual earnings are down 12.7 percent and have come in 19.1 percent above forecasts, according to Thomson Reuters.
"It could be choppy and trend lower," said Tim Smalls of Execution LLC of Wednesday's stock market.
"There's a lot of reason for the S and P to run out of steam at these levels. There's historical reason, there's technical reasons," he said. "After this week, you have the majority of the S and P reporting earnings so there's not much to look forward to. Today and tomorrow are really the big days."
As stocks waffled Tuesday, the dollar firmed slightly against other currencies and bonds found buyers. Commodities traded lower, with oil slipping $0.52 per barrel to $79.09 and gold nearly flat at $1057.80, down $0.50 per troy ounce. Oil could be volatile Wednesday after 10:30 a.m. inventory data. API data Tuesday afternoon weighed on oil prices, after the data showed oil stockpiles rose more than expected last week.
Treasurys found buyers across the curve but the bigger moves were in shorter duration securities. David Ader, Treasury strategist with CRT Capital, said the market appears to be moving on the expectation of new issuance next week, rather than other news.
"We have no auctions this week. The next bout of supply is 2s, 5s and 7s (year notes) so to find the curve flattening between 10s and 30s, then everything makes a bit of sense purely from a supply consideration. The market is relatively thin," he said.
Brazil's stock market fell nearly 3 percent and its currency lost 2.2 percent Tuesday, after the Brazilian government moved to put a 2 percent tax on foreign purchases of stocks and fixed income instruments, a move guaranteed to chill some of the excitement about its markets.
Win Thin, currency strategist with Brown Brothers Harriman, said the tax is old news in Brazil as it's been seen before. The government had reduced the tax in October, 2008 to zero from 1.5 percent, as capital fled emerging markets in the financial crisis. Brazil officials said they imposed the tax to stem the real's appreciation and avoid a bubble in stock prices.
Thin said Brazil is not alone in being worried about the strength of its currency against the U.S. dollar. He noted that the Bank of Canada warned its currency is getting too strong, a comment that triggered a decline in the Canadian dollar Tuesday to its lowest level since Oct. 9.
Thin said he sees Tuesday's trade against risk assets as temporary, and the trade should reverse and the dollar should continue its decline.
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Michael Darda, economist with MKM Partners, said it makes sense to take profits in Brazilian stocks, which are up nearly 80 percent this year. However, he said in a note Tuesday, he would not yet consider the market a "short."
"..We do believe other emerging markets now offer a better risk/reward ratio," he wrote. Brazilian equities have outperformed the iShares Emerging Market Equity Index (EEM) by 1700 bps, he points out.
Darda said the tax doesn't signal the end to foreign investment in Brazil, but it will be less attractive than other markets. "We thus recommend taking profits in Brazil and redeploying them into positions in Russia, Africa/Middle East, India and/or various fast-growth East Asian nations."
What Else to Watch
The Labor Department releases its monthly jobs report, highlighting data from individual states, at 10 a.m.
Boston Fed President Eric Rosengren makes opening remarks at 4:30 p.m. at the Boston Fed's annual economic conference in Chatham, Mass.
The Senate Committee on Homeland Security and Governmental Affairs holds a hearing on monitoring the nation's response to swine flu.
The SEC holds a hearing to bring transparency to trading in Wall Street's dark pools. —