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Goldman Sachs’ Big Beat Highlights Morning; Netflix, Yellen On Tap After Close

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January 18, 2017

(Wednesday Market Open) Like clockwork, big bank earnings keep rolling in better than expected. Goldman Sachs (GS) and Citigroup (C), both of which reported early Wednesday, are the latest to beat Wall Street’s bottom-line estimates, though C came in a bit shy on the revenue side of the equation.

Today is the last day of banks basking in the earnings spotlight. Inflation data and a speech later this afternoon by Fed Chair Janet Yellen are the other key agenda items. Yellen is scheduled to speak on monetary policy and its tools in an address to the Commonwealth Club in San Francisco at 3 p.m. EST. Meanwhile, overseas, Japan’s Nikkei Stock Average, which had tanked on Tuesday in part due to a weaker dollar, posted moderate gains Wednesday as the dollar rebounded a bit.

Getting back to earnings: C came in at $1.14 per share, beating the average Wall Street analyst estimate by two cents. However, C fell short of estimates on revenue. GS killed it on earnings, reporting $5.08 per share, vs. a $4.82 Wall Street estimate, and also easily beat top-line estimates. Trading results looked awesome, and GS is the bank most influenced by trading. In its press release, GS said bond-related trading soared 78% in Q4, and cited “an environment generally characterized by improved market conditions, including rising interest rates and tighter credit spreads.”

Starting this afternoon, it’s on to other industries, with Netflix (NFLX) today, IBM (IBM) tomorrow, and General Electric (GE) on Friday. There was widespread thought going into earnings that financials would do well. Now how about the other areas of the economy?

Let’s start with NFLX, since it’s batting first. Last time out, NFLX surpassed analysts’ earnings expectations, so we’ll see if that happens again. NFLX has a big international business, so it could be interesting to see how the stronger dollar affected that. Wall Street consensus is for earnings per share of $0.13 cents, up from $0.10 cents a year earlier, according to Briefing.com.

Tomorrow, IBM will be the first major tech company to report. And GE’s earnings on Friday could serve as an indicator of how the broader economy is performing, simply because GE has its proverbial hands in so many different types of products.

Currency continues to be a factor, with the British pound making its biggest one-day gains in eight years yesterday after President-elect Trump said the dollar was looking too strong. 

Volatility turned upward early Tuesday but then slipped back toward recent levels later in the day, according to the CBOE’s VIX. With inauguration just two days away, some market participants are beginning to wonder when they’ll see more concrete proposals on health care, taxes, fiscal stimulus, and infrastructure from the new administration, and those concerns may have fueled some of the rise in volatility. However, VIX was back below 12 by early Wednesday.

Additionally, we saw some weakness in the Nasdaq yesterday, especially among semi-conductors, but Nasdaq has had an incredible run and was slightly higher in pre-market trading.

The U.S. Consumer Price Index (CPI) for December rose 0.3%, in line with expectations, the government reported early Wednesday.

S&P 500

FIGURE 1: WEARING FLATS.

The S&P 500 Index (SPX), plotted here through Tuesday on the TD Ameritrade thinkorswim® platform, has barely budged over the last month, rising just over a quarter of a percent. This has accompanied a period of the lowest January volatility in a decade. The SPX range continues to be roughly between 2251 and 2275.  Source: Standard & Poor’s. For illustrative purposes only. Past performance does not guarantee future results.

More Housing Numbers Up Next: Thursday brings December housing starts, which are expected to rebound slightly following a rather weak November report. Wall Street analysts expect improvement in the December number, to around 1.2 million from below 1.1 million in November, Briefing.com said. The three-month average is around 1.16 million, which remains near one-decade highs. The November downturn was paced by a 45% decline in multi-unit starts, yet it also featured a 4.1% decline in single-family starts to a seasonally adjusted annual rate of 828,000.

Fed Just Two Weeks Away, So Watch Volatility: Today’s CPI report puts the focus once again on inflation, which the Fed watches closely. The futures market continues to point toward the Fed’s early February meeting being a quiet one, with just a 4% chance of a hike at that time, according to the CME. The March meeting brings about a 21% chance, and that rises to 34% in May.

Health Care M&A Ahead? Health care remains one of the best-performing S&P 500 sectors over the last month, and many analysts remain bullish about prospects for the full year. There’s a sense that more M&A activity might occur, as many larger drug companies have cash on hand. Tighter government rules on inversions, deals in which the acquiring company moves its headquarters overseas to save on taxes, could make domestic drug companies look more inviting for big pharma.

Good Trading,
JJ
@TDAJJKinahan

Economic Calendar

FIGURE 2: THIS WEEK'S ECONOMIC CALENDAR.

Source: Briefing.com

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JJ Kinahan

JJ began his career in 1985 as a Chicago Board Options Exchange...

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