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Market Update

Catalyst Awaited: Market In Cautious Mode Ahead of Key Earnings Due Friday

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January 10, 2017

(Tuesday Market Open) A cautious tone crept into the markets early Tuesday as participants sought a catalyst ahead of earnings data from the big banks due later this week. Monday’s slight sell-off didn’t take indices down much from recent all-time highs, and a mixed open appeared likely.

Caution is the word of the day, with much of the focus on big bank earnings due Friday and on a few smaller data points due later Tuesday (see below). Many are also watching the crude oil market to see if it can break out of its recent range between $50 and $55 a barrel.

Financial earnings come into the spotlight Friday, but it’s also worth taking a broader view of the total Q4 earnings picture as the season starts. Early analyst estimates point toward earnings growth in the 4.4% area, up from 4% in Q3 and the second-consecutive quarter of earnings gains after a long slump. The question is whether a strong dollar might pose a headwind for some of the multinationals.

Speaking of the dollar, it was down slightly early Tuesday from recent highs, but the British pound has been struggling this week as concerns mount about how Britain could execute its exit from the European Union.

Fed speakers have started to pop up now that the new year is well underway, and Boston Fed President Eric Rosengren on Monday said the Fed should raise rates more than once this year to help fend off inflation. Several more Fed speakers are scheduled on Wednesday.

Recent Januarys have been marked by Wall Street turbulence, but so far this January, there’s barely been a ripple in the market, at least judging from volatility. The VIX stayed below 12 early Tuesday, and remains at its lowest levels for the month of January since 2007, before the Great Recession. The January closing low in 2007 was 9.89, so there’s still a ways to go to meet those levels, but it certainly seems like market participants don’t expect much storminess in the near term.

Those concerns we heard late last year about the possibility of U.S. oil producers ramping up production if prices rose above $50 seem more and more prescient. Last week, Baker Hughes reported the number of U.S. oil rigs climbing for the 10th week in a row, up four to 529. That’s 13 rigs above a year ago, Baker Hughes said, and well above the lows seen last spring.

Additionally, the research arm of Barclays made headlines early Monday, saying it expects North American oil companies to increase exploration and production budgets by 27% this year. Oil prices, which had been probing the $55 a barrel mark for U.S. crude last week, fell back below $52 by the end of Monday’s session, and remained near three-week lows early Tuesday. Meanwhile, the question on many minds is whether OPEC members can stick to their output agreement. It promises to be another interesting year in the oil market, and the energy sector of the stock market.

S&P 500

FIGURE 1: VIX AT 10-YEAR LOW FOR JANUARY.

The S&P 500 Index (SPX), plotted here through Monday on the TD Ameritrade thinkorswim® platform,  fell even as volatility, measured by the VIX (purple line) sank back to pre-holiday levels. Volatility remains muted, and hasn’t been this low in January since 2007, according to CBOE data. Source: Standard & Poor’s. For illustrative purposes only. Past performance does not guarantee future results.

Starting Off with a JOLT: The week’s data parade is scheduled to start this morning with the government’s monthly Job Openings and Labor Turnover Survey (JOLTS) report for November. The October report showed more than 5.5 million job openings, down from the prior month but still near all-time highs. At the same time, hiring fell to 5.1 million positions in October, and lagged openings by a wide margin. Could this mean employers are having trouble finding the right people to fill jobs as the unemployment rate falls, which can sometimes signal possible inflation ahead? “Mind the gap,” they say on the London Underground, and investors might want to heed that advice to see how far apart openings are from hires when the report comes out at 10 a.m. ET.

Checking Inventory: The other report at 10 a.m. ET today is wholesale inventories, which can provide investors a sense of how much pricing power companies might possess. The reading fell 0.4% in the advance report for November, but economists surveyed by Briefing.com expect to see a big 0.9% jump in today's report. As always, the metric to watch with this report is the ratio of wholesale inventories to sales, which fell to 1.3 in November. A lower ratio points toward improved pricing power if demand continues to grow. But considering the ratio was down around 1.2 only a couple of years ago, it seems like there’s still a chance it could fall further.

Hello? Earnings? It’s the start of earnings season, but it might be hard to tell early this week. Arguably, the first “biggie” is Delta Airlines (DAL), which says it’s holding its earnings call early Thursday. However, anyone hoping to learn about the full state of the airline industry will have to wait, as the other major airlines won’t be reporting until later in the season. Patient earnings watchers get their rewards early Friday, when three big banks are scheduled to report, putting the financial sector squarely in the spotlight. These reports will be accompanied by the government’s scheduled release of December retail sales, making Friday the day to watch this week.

Good Trading,
JJ
@TDAJJKinahan

Economic Calendar

FIGURE 1: THIS WEEK'S ECONOMIC CALENDAR.

Source: Briefing.com

Want More on the Markets?

Watch @TDAJJKinahan on Periscope discussing this week's markets and the start of earnings season. He'll be live at 8:30 a.m. EST Wednesday.

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