As pen hits paper on a phase one China deal today, investors have their eyes focused on more bank earnings, along with inflation data today and retail sales tomorrow.
Mixed results for Goldman Sachs, but Bank of America beats estimates
Signing ceremony today for phase one China deal could provide more details
Market awaits retail sales, Morgan Stanley earnings tomorrow
(Wednesday Market Open) Today’s the day many investors waited for the last two years. Pen is finally hitting paper on a phase one trade deal with China.
That doesn’t mean the market’s out of the woods. Far from it. Stocks gave up some of their early gains yesterday after a news report that tariffs would continue. That took some of the wind out of the sails, even though no one ever was promised that a phase one deal would remove tariffs. The market looks set for a flat to lower opening this morning, judging from overnight trading.
When you think about the trade with China, there’s still a bunch of delicate issues to work through on topics like intellectual property and technology transfers that didn’t necessarily get resolved by the deal being signed today. In fact, we still don’t know all the details of the phase one agreement. We’ll talk more about all this further down.
JP Morgan (JPM) and Citigroup (C) got earnings off to a good start yesterday. The year-over-year numbers looked great, but let's not forget the fourth quarter of 2018 was miserable. Earnings comparisons could get more challenging from here on for some of the big banks that were struggling in late 2018 and on the rebound by the first half of 2019.
Despite solid results from those two and mostly strong showings this morning from several other big banks (see more below), markets have a weaker tone early Wednesday following Tuesday’s slight downturn. If you’re keeping score at home, it’s been more than a month since the S&P 500 Index (SPX) fell two sessions in a row. If today ends that streak, it wouldn’t be the end of the world. Things can’t keep going up forever without a break.
The firm bank earnings came amid challenges for the industry when you consider the low interest rate situation. Banking is the sector that had to work against the macroeconomic environment more than any other after the Fed cut interest rates three times last year. However, consumer health came through in the clutch, with credit card operations shining.
This morning, Goldman Sachs (GS) and Bank of America (BAC) joined the earnings parade. BAC registered better than expected earnings per share and revenue, while GS saw revenue beat estimates but missed on earnings.
Both banks benefited from firm trading volume. Bond trading revenue led the charge at GS, rising 63% year-over-year, though you have to remember the Q4 last year was rough for trading across the board. Stock trading also climbed at GS last quarter by about 12%.
BAC got some benefit from lower interest rates that helped lead to more consumer borrowing in Q4 as total loans and leases rose 4%. However, the weak rates did eat into net interest income, which fell 2.9% from a year earlier. Like the banks that reported yesterday, spending was disciplined but the macroeconomic picture makes it hard for this sector.
The GS earnings miss looked related to a litigation charge. The company is gearing up for an investor day later this month when it will release strategic goals and financial targets, GS said in a press release. The company’s one-time charge means the earnings number doesn’t look great, but what investors wanted to see was strong performance from investment banking and the brokerage business and that’s what they got.
Shares of both GS and BAC fell in pre-market trading. For BAC, earnings were good but the stock was up over 40% last year. When you have that kind of movement, the company almost has to do something spectacular with earnings to get more traction. Earnings today were good, but not unbelievable, and the stock’s had a good run.
BlackRock (BLK) also reported strong earnings today but didn’t get much of a reward from investors in pre-market trading. BLK’s revenue from investment advisory, administration fees and securities lending in Q4—the biggest component of its revenue—rose 11%.
Morgan Stanley (MS) is set to report tomorrow morning. Analysts expect a strong quarter. With MS, consider looking for some of the same metrics we saw today. Focus is likely to be on investment banking and trading.
With tariff jitters still dominating trade talk yesterday, markets skidded to a mixed close. Bonds gained a little bit and the 10-year yield dropped to 1.81%. Gold is hanging in there near recent highs, but gave up some ground Tuesday. Volatility remains hard to find.
Besides the bank earnings and producer prices today, investors might want to look out for the weekly U.S. crude stockpiles data. Last week it surprised to the upside, one of a bunch of things keeping U.S. crude on the defensive lately after that early January surge. Last year, crude spent a lot of time hovering near $55, so at current levels below $59 it’s possible the $55 level might hold some technical support.
Since we’re talking technicals, one consideration is how last week’s brief fling above 29,000 for the Dow Jones Industrial Average ($DJI) might be affecting the market. That intraday peak could be one reason things have gotten sluggish over the last few days. Sometimes when a major index hits a big round number, you see stocks fall back and consolidate for a while before retesting it. The market had a bit of “buyer exhaustion” yesterday, Briefing.com observed. Earnings drive stocks, so maybe if results stay firm it might give buyers more energy.
On the down side, valuations are pretty high compared with recent years. That means companies that miss expectations could get punished more than usual. Even meeting expectations might not be enough to get investors excited, especially considering 2019 earnings overall have barely risen even while stocks have rolled up one record high after another. Things seem a bit defensive, with investors looking for a catalyst. Earnings season might give people a pause to re-assess.
The focus today could be on the Producer Price Index (PPI), which rose just 0.1% in December. That might mean less reason for the Fed to worry about any inflationary winds blowing. The PPI is up just 1.3% over the last year.
More key data arrive tomorrow in the form of December retail sales. Wall Street consensus is for a rise of 0.3% in retail sales, up from 0.2% a month earlier. Consider paying attention to the separate figure that strips out cars, however, because weakness in the auto industry might drag down the headline number. Though 2019 was a decent year as a whole for car sales, December wasn’t the best month down at the dealership.
CHART OF THE DAY: Indecisive Dollar: On the daily chart of the US Dollar Index ($DXY-candlestick), the 50-day moving average (blue line) has acted as a relatively strong resistance level since early December. The last four trading days suggest $DXY could go either way as prices bounced off and moved below the moving average. Could $DXY break out above the moving average or will it continue bouncing off it and move lower? Economic indicators could influence the action in the U.S. dollar but where the dollar goes could impact the price of gold and other commodities. Data Source: ICE. Chart source: The thinkorswim® platform from TD Ameritrade. For illustrative purposes only. Past performance does not guarantee future results.
Will Trade Deal Signing Spark Investment? One question as the phase one deal gets signed today is whether U.S. manufacturers, some of whom appeared to hold off infrastructure investment as they waited for trade rules to become clear, are ready to jump back in or still feel like they need to know more. It’s a good time to keep monitoring earnings calls, especially from big multinationals, to see if you can glean anything on the trade and investing fronts. Executives are almost certainly going to be asked.
Any major revival in company investment could help the U.S. economy shake off the sluggish growth we’ve seen for a while now, and maybe keep job growth on a constructive path. However, it’s going to take a while to figure out where everything might land. Stay tuned, and consider watching for any new trade deal agreements that might surface from today’s signing. If there’s anything major that people didn’t know about, it could have a market impact.
Trade-Related Earnings to Watch: Companies with major exposure to China expected to report soon include IBM (IBM) next week and Caterpillar (CAT) and Apple (AAPL) later this month. Transport firms like railroads might also have something to say about any possible pickup in freight demand now that it looks like China might be stuffing cargo ships full of U.S. agricultural commodities. China’s December soybean imports jumped 67% year-over-year and 15% from November as some delayed U.S. soybeans cleared customs, Reuters reported, citing customs data. Right now, China sources 80% of its soybeans from Brazil, however.
Trucking Along: Transports lagged the broader market last year, but maybe they’ll get some traction now that earnings season’s arrived. Delta (DAL) kicked things off nicely for the sector yesterday thanks in part to low fuel costs and what the company’s CEO called “healthy” demand for travel. United Airlines (UAL) reports next week, and we’ll see if they also rode the wave of that magic formula for airlines of affordable fuel and consumer health. The transport sector isn’t just airlines, naturally. There’s also freight, and we’ll hear next week from Union Pacific (UNP). The stock is outperforming its sector, but analysts are worried that the long trade war might have dampened freight volume. Also, railroads and other freight handlers face growing competition from delivery providers like Amazon (AMZN). The Dow Jones Transportation Average ($DJT) surged nearly 1% Tuesday, and is up about 2.4% so far this year compared with 1.6% for the SPX.
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