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Momentary Interruption: ECB Meeting Could Provide Distraction From Earnings

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October 23, 2017

(Monday Pre-Market) Get ready for a gusher of a week.

One of the biggest earnings days of the quarter comes this Thursday, the same day that the European Central Bank (ECB) meets. Investors also get a first look at Q3 economic growth and await earnings from some of the economy’s most closely watched industrial behemoths.

Each day of earnings season has its highlights, but few days are more eventful than the day that Microsoft (MSFT), Alphabet (GOOG), and Amazon (AMZN) all open their books. That’s what happens this coming Thursday afternoon, and could give investors insight into not only the info tech environment, but also the consumer with AMZN. Info tech remains on a roll, up about 30% year-to-date, and earnings from some of the most influential players have the chance to reinforce investor optimism or perhaps quell it a bit. We shall see.

While MSFT is the longest-toothed of the triumvirate on Thursday, none of those companies was publicly traded before 1986. On the other hand, this coming week also brings us earnings from some old hands on Wall Street, including McDonald’s (MCD), Caterpillar (CAT), Lockheed Martin (LMT), and General Motors (GM) on Tuesday, CocaCola (KO), Baxter (BAX), and Boeing (BA) on Wednesday, Ford (F) and American Airlines (AAL) on Thursday, and Merck (MRK), Chevron (CVX), and ExxonMobile (XOM) on Friday.

There’s no doubt it’s a busy week for earnings lovers, and remember not to just look at the numbers, but also listen to as many calls as possible. If there’s no time to listen, try to find the transcripts online and get a sense from those. Aside from notable exceptions so far like General Electric (GE) and United Continental (UAL), a sense of optimism has seemed to pervade earnings calls to date this quarter. The thing to listen for is less about where the companies have been and more about what they expect both internally and from the economy in the coming months.

Pay special attention to retail companies’ expectations for the holiday season and to industrial and info tech companies’ perspective on the dollar and its effect on overseas business. It could also be instructive to get perspective from the big oil companies on where they expect energy prices to go from here.

For more detail on individual company expectations and earnings results, keep an eye on this site, as we’ll be running earnings previews throughout the week and discussing results in this column on a daily basis.

Thursday’s already a busy day with all those earnings, but throw an ECB meeting into the mix and it really could get interesting. The ECB has continued to inject a large amount of funds into the bond market every month, to the tune of about $70 billion. That’s even as the U.S. Fed has embarked on a rate-raising cycle and has begun unwinding its own quantitative easing program. This presents a dichotomy in the bond market, where European yields are dramatically lower than yields in the U.S., perhaps keeping U.S. bond prices propped up.

ECB President Mario Draghi has sent mixed signals over the last months about when the ECB might begin lowering its monthly nut. European inflation in September remained below the ECB’s target, which could mean pressure on the ECB to continue its stimulus.

However, many analysts have said that Draghi could respond to Europe’s general economic improvement by announcing a drop in the monthly asset purchase program, perhaps to start next year. Keep an eye on the bond market, because any ECB move could put pressure on U.S. bond prices, conceivably sending yields higher. The benchmark U.S. 10-year yield has begun creeping up again ahead of the ECB meeting, reaching 2.37% by midday Friday, the highest it’s been since July. The level where yields might become a headwind for the U.S. economy is unclear, but it’s fair to say even at this point they remain relatively low from a historic standpoint.

The dollar index, which tracks the greenback vs. a basket of other currencies, might also be worth watching as we prepare for the ECB meeting and a Fed meeting the following week. The index appeared to get a boost early Friday from the U.S. House vote for tax legislation and amid continued hawkish language from Fed officials. Still, the index remained below 94 as of midday Friday, and hasn’t closed above 94 since late July.

Few expect the Fed to hike rates when it meets the week of Oct. 30, as futures prices point to a better than 98% chance of rates remaining unchanged at that meeting. However, the futures market puts odds of a hike by the end of the year at 91%. These solid odds also could be a factor supporting the dollar, which in turn could put pressure on the crude oil market. Oil tends to weaken when the dollar strengthens.

We’re getting toward the time of year when oil typically displays signs of seasonal weakness, as well. That said, oil supplies fell sharply in the U.S. in the most recent government report, a potential indication of continued strong demand that might reflect growth in the economy.

Speaking of economic growth, another data point to watch this coming week is the government’s first estimate for Q3 gross domestic product (GDP). The report, due on Friday morning before the opening bell, could be interesting because it might provide a better sense of whether the strength seen in Q2 was lasting or transient. Growth in Q2 was 3.1%, the first time GDP topped 3% since Q1 2015. The final Q2 report showed pickups in business and consumer spending, so watch to see if that carried through into the summer months.

Nasdaq

FIGURE 1: NASDAQ WELL OUT IN FRONT.

The Nasdaq (COMP, represented by the top purple line) still easily leads all major indices so far this year, trailed by the Dow Jones Industrial Average ($DJI), the S&P 500 (SPX), and the Russell 2000 (RUT). Major tech earnings this coming week could keep the focus on the tech-heavy Nasdaq in days to come. Data sources: Nasdaq, Dow Jones, Standard & Poor’s, FTSE Russell. Chart source: The thinkorswim® platform from TD Ameritrade. For illustrative purposes only. Past performance does not guarantee future results.

 

Who’s Next at Fed? That’s a question many investors might be paying close attention to over the next week, with some media reports saying a decision could come within days. Late last week, Washington media outlet Politico reported that President Trump might be “leaning toward” Federal Reserve Governor Jerome Powell. The outlet also said of the five finalists, Powell would likely face the least opposition to confirmation in the Senate. The question is, what sort of Fed chair would Powell be? As a Fed governor, Powell has voted mainly in line with current Fed Chair Janet Yellen on monetary policy decisions and post-crisis financial rules, and could be seen as a safe pick more likely to stay the course than shake things up. Powell’s nomination, if it happens, could also mean a less shaky market reaction than if Trump was to do what some investors originally thought he might and reach for a less conventional choice.

Nasdaq Still Ahead in Index Race: Major League Baseball fans might be familiar with the “sausage” race in Milwaukee. The stock market also might be said to stage a race each year, this one between major indices to see which comes out on top. Well, the “race” to put in the biggest index gains of 2017 has a little more than two months left, and the Nasdaq (COMP) remains comfortably ahead. Toward the end of last week, COMP was up more than 22% year-to-date, vs. 17% for the Dow Jones Industrial Average ($DJI) and 14% for the S&P 500 (SPX). While info tech’s 30% gains play a big role in the COMP’s lead, don’t forget biotech’s 26% jump so far this year. The Russell 2000 (RUT) small-cap stock index still trails the pack with gains of just under 11% year-to-date, as investors seem to be more enticed for now with big names in the DJIA and biotech and info tech stocks in the Nasdaq.

Tax Plan (Stock Market) Beneficiaries: The potential passage of a new U.S. tax plan raises a lot of debate about who might benefit. It’s also worth looking at which stock sectors might have the most to gain. If initial market reaction to the Senate’s passage of tax legislation late Thursday is any guide, it looks like financials and info tech might be among the sectors investors expect might get a boost, as both jumped solidly in early action Friday. Hopes that potential lower taxes might spark more economic activity appear to have contributed to the strength in financials, while hopes for a tax repatriation could factor into info tech’s gains.

Good Trading,
JJ
@TDAJJKinahan

Economic calendar

FIGURE 2: THIS WEEK'S ECONOMIC CALENDAR

Source: Briefing.com

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