July 14, 2020

Earnings Season Begins And Stocks Slide

Earnings Season Begins And Stocks Slide

The Dow Jones futures are trading lower as investors are bracing themselves for the earnings report. This earnings period could mark the bottom for the US stocks as the process of the re-opening of the global economy has begun. Of course, local shutdown around the globe, together with the emergence of the second wave of coronavirus have considerably constrained the re-opening process. However, the fact is that every day we are gaining a deeper understanding of the virus, and in so doing, getting closer to finding a vaccine. 

Wall Street acknowledges that the world is better prepared to deal with the pandemic now then it was at the beginning of this year. Similarly, corporates have a better understanding of how to deal with the current situation as compared to the period when everything was closed. Speculators are likely to bet on this fact, that this quarter may mark the worst for the stock earnings and any sell-off in stocks due to their weak earnings could be an opportunity to bag some bargains. 

However, traders are concerned about the overstretched stock valuations. The fear is that we have gone too far and too fast. Setbacks caused by the emergence of a second coronavirus wave are not fully priced. 

The S&P 500 and the Dow futures are also under the influence of the news that the Trump administration has further escalated the already existing tensions with China. The relationship between Washington and Beijing is strained because of the territorial dispute in the South China Sea. The US has rejected China’s claim regarding the South China Sea. Basically, the Trump administration has reversed the previous US policy of not taking sides in territorial disputes. 

In a retaliation action, China is going to put sanctions on Lockheed Martin. Investors are primarily concerned about this continuous escalation of tensions between the two major superpowers. 

The global stock market had a negative trading session. The HSI index fell the most, and it closed with a loss of 1.09%. The Shanghai index and Japanese Nikkei index also posted losses of 0.83% and 0.87%, respectively. 

Here is more on this:

 Bank Stock Earnings 

Wall Street investors expect the continuation of the message they received during the last stock earnings with respect to bank earnings. JPMorgan, Citi, and Wells Fargo will report their quarterly earnings, and the expectations are that their earnings will be under the influence of an increase in provision for loan losses and depressed consumer spending. However, we may see some bright spots in trading revenue because of the volatility in the US stock market. 

Oil Prices: OPEC+ May Taper its Supply Cut 

The biggest question for oil traders is the partnership between OPEC+ and Russia that resulted in curtailing the oil supply. How long will this partnership last, and how will they address the upcoming expiry of this agreement are the two questions for traders. Looking at the sideway price action of WTI and Brent, it is clear that traders are not sure about the future of the oil price, but they are optimistic that the prices will not fall off a cliff like before. The expectations are that they will increase the supply by a small amount, which could be somewhere around 2 million barrels b/d. 

Dow Jones and S&P 500 Futures Today

The Dow futures are trading lower today as the stock market rally fatigue settles in. Overall, risk sentiment is taking a hit because investors have become cautious. 

The Dow Jones index briefly crossed above the 50-day simple moving average on a daily time frame yesterday, which is positive for the stock market rally. However, traders were quick to take the profit off the table, which is why we did not close above this moving average yesterday. Overall, the Dow’s price looks solid because the DJIA’s index price is trading above the two critical moving averages: 100 and 200-day SMA. 

 CHART 1

Stock Market Rally 

 The US stock market gave up most of its gains in the final hour of trading yesterday, and this was a confirmation that traders are unsure of how the new earnings season will shape up the risk rally. 

 The S&P 500 stocks fell 0.94% and gave up all of its gains. The information technology sector led the S&P 500 index lower, 278 shares fell while 226 stocks advanced. The S&P 500 index is down 0.77% over the past five days, but it is up 3.75% over the past 30 days. 

The S&P 500’s airline index is likely to be the focus for investors today. The airline index has the second-largest weighting in the S&P 500 index. The airline index peaked in June, and ever since, we have seen a downtrend. Delta Airlines will report its earnings today, and investors will be looking at the impact of Covid-19 on its passenger traffic. 

CHART 2

The Dow Jones closed higher and posted small gains of 0.04%. 17 stocks of the Dow index soared, and 13 dropped. Pfizer was the biggest mover and advanced by 4.08%. 

The NASDAQ composite, the tech-savvy index, experienced the most significant loss yesterday and closed lower by -2.13%.

 Coronavirus: 13 Million 

Globally, coronavirus cases have surpassed the 13 million mark, and over 570K people have died as a result of Covid-19. Coronavirus cases in the US increased by over 64K from a day earlier. This is a 2% increase in Covid-19 cases, which is pretty much in line with the average daily surge of 1.9%. 

Japan said that it would not hesitate to declare another emergency if this is what would be needed to stop the spread of the virus. Wearing a mask will be made mandatory in the UK from July 24th. Again, this is a measure designed to stop the coronavirus spread or, more importantly, avoid the second wave of coronavirus in the UK. 

Coronavirus surge in the US is slowing the recovery process while Singapore reported that it has entered a recession, and its GDP has dropped by a record 41.2% from the previous three months.