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Tech Takes Center Stage After Strong Facebook Results, With Amazon in the Wings

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July 27, 2017

(Thursday Market Open) The earnings extravaganza keeps on churning today, with a boatload of companies stepping into the spotlight, including Amazon (AMZN). Eyes also turn toward Capitol Hill, where Senate Republicans scramble to move ahead with health reform legislation.

Facebook’s (FB) Q2 earnings looked solid, beating estimates from Wall Street. The stock moved higher in pre-market trading, helping lend a firm tone to the overall market. Facebook’s $9.19 billion ad revenue tally beat analysts’ average estimate for $9.02 billion, so things seem to be in good shape there. 

The battered telecom sector showed some signs of life, with Verizon (VZ) reporting better than expected revenue one day after AT&T (T) moved higher on its earnings. The money VZ has spent on acquisitions appears to be paying off, and the stock and sector remain popular with TD Ameritrade clients in part due to nice dividends.

On the other side of the ledger, Twitter (TWTR) fell sharply in pre-market trading as investors appeared to fret over signs of slowing user growth. And while United Parcel Service (UPS) beat on top- and bottom- lines, its margins looked a little light. UPS results are often seen as a good measure of consumer confidence, and the takeaway from its margin performance could be that while consumers are definitely out there spending, the companies involved are letting them do so for very thin margins.

Stocks once again set new highs on Wednesday for all the major indices, with the Dow Jones Industrial Average ($DJI) getting the biggest boost amid solid earnings. Wednesday was Boeing’s (BA) day to carry the DJIA, as BA climbed 9% after beating analysts’ estimates for earnings per share and raising guidance. It was the best day for the stock in nearly a decade.   

Some of the other key earnings to watch this morning include Bristol-Myers (BMY), ConocoPhillips (COP), Dow Chemical (DOW), Fiat Chrysler (FCAU), MasterCard (MA), and Procter & Gamble (PG).

After the close, Amazon (AMZN) takes center stage. It probably goes without saying this is a really big one to watch, because AMZN can often help tell a broader story about consumer sentiment. It should also be interesting to listen to the company’s conference call for any new perspective on the purchase of Whole Foods (WFM). Amazon’s Web Services cloud computing division is another area to watch outside of the company’s core retail business.

Also this afternoon: Take a coffee break as Starbucks (SBUX) opens its books.

The key takeaway from this week’s Fed meeting, as we noted yesterday, is the Fed’s promise to begin unwinding its $4.5 trillion balance sheet “relatively soon.” 

"The committee expects to begin implementing its balance sheet normalization program relatively soon, provided that the economy evolves broadly as anticipated," the post-meeting statement said. That language was changed from the Fed’s previous reference to, “this year,” appearing to give it more immediacy. There’s been speculation that the process might begin in September, sort of like going back to school, but there’s still no firm date.

Whenever the Fed ultimately decides to start the process, don’t expect it to necessarily be smooth. It's going to be difficult to not disrupt the markets somewhat as the Fed starts to reduce its asset portfolio. However, to the Fed’s credit, it’s done a good job of being transparent, and that transparency could help smooth the way as much as possible. The main concern is that with additional supply on the market through the Fed’s unwinding, bond prices could fall quickly, causing yields to rise and possibly choking economic activity. 

After the meeting concluded, Fed funds futures continued to show odds for another rate hike by the end of the year at around 50%, about where it’s been for a while now. Whether we get one more hike this year probably depends on earnings and data between now and then, as well as the balance sheet process and how the market and the economy react to that.

Whatever the case, investors don’t seem too worried about market volatility in the near future, as the VIX fell below 9 at one point yesterday to a new all-time low.

Copper

FIGURE 1: COPPER MAKES A RUN.

Copper futures prices jumped to two-year highs Wednesday amid talk of possible growing Chinese demand for this key industrial metal. While this can often be a sign of economic strength, especially among countries that buy products from China, rising copper prices could also become a barrier for industrial firms by increasing their materials costs. Data sources: CME Group. Chart Source: The thinkorswim® platform from TD Ameritrade. For illustrative purposes only. Past performance does not guarantee future results.

GDP Watch Begins: Tomorrow brings the government’s first estimate for Q2 Gross Domestic Product (GDP), and a consensus of Wall Street analysts stands at 2.8%, according to Briefing.com. That’s a significant uptick from 1.4% in Q1, but slightly lower than some economists had predicted a few months ago. Still, if the number comes in as high as 2.8%, that would be the highest GDP growth since Q2 2015, and would mark the fourth-straight quarter in which GDP has risen from the previous quarter. Keep in mind, however, that the government gets two more cracks at this, so the number we see tomorrow isn’t the last word on the matter. Personal consumption expenditures helped drive up the government’s estimates for Q1 growth, so let’s see if that remains a positive factor in tomorrow’s Q2 GDP estimate.

Falling Crude (Inventories): One factor driving oil prices higher continues to be strong U.S. demand, and nothing changed there in the most recent government stockpiles report. Crude stocks fell more than 7 million barrels last week, the Energy Information Administration (EIA) said Wednesday, with gasoline stocks also down significantly. We’re at the point where gasoline stocks have actually fallen below year-ago levels after a long period of swollen stockpiles. On a more bearish note, crude oil production remains above 9.4 million barrels a day, the highest level in two years and a historically hefty number (record U.S. production was 10 million barrels a day back in the early 1970s). So even as the energy sector starts waking up from it’s long slumber, as it did Tuesday and Wednesday, keep those heavy production numbers in mind and understand that supply could continue to block big gains in the underlying crude price. 

Old Home Week On Wall Street: The list of major U.S. companies beating Wall Street’s earnings expectations in recent days might remind one of “old home week,” a tradition some small towns have in which all the old residents journey back for a reunion. That’s because the names are so familiar, and have been stalwarts of the stock market for so long. They included AT&T (T), CocaCola (KO), Ford (F), Boeing (BA), Hershey (HSY), and Baxter (BAX). It’s a real slice of Americana, and certainly takes some of the spotlight away from high-flying, headline-grabbing info tech names. Techs resumed their place in the sun late Wednesday with Facebook (FB) and continue this morning with Twitter (TWTR) and later today with Intel (INTC) and Amazon (AMZN). For a while there, though, we were feeling nostalgic.

Good Trading,
JJ
@TDAJJKinahan

Economic Calendar

FIGURE 2: THIS WEEK'S ECONOMIC CALENDAR.

Source: Briefing.com

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