Morning Minutes 10/26/2018

US GDP and Big Tech Earnings Move Markets

October 26, 2018
9:00 am EDT

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Market Commentary By:
Colin Cieszynski, CFA, CMT
Chief Market Strategist
ccieszynski@siawm.com
+1 (647) 282-4428

Once again, a relief rally in stock markets has been short lived. Asia Pacific markets fell overnight with the Hang Seng losing another 1.1% and the Nikkei falling 0.4%. Europe remains under heavy pressure on indications that US President Trump may be siding with Italy in its battles with the EU. The Dax is down 1.4% while the FTSE is down 1.1%. US markets appear to be setting up to give back half of yesterday’s gains with Dow Futures down over 200 points this morning in response to a 400-point Thursday gain.

Heading into the weekend, investors appear to be pulling capital out of risk markets again. In addition to another selloff in stocks, money is also moving out of crude oil with WTI down 1.1%, and copper, which is down 1.4%. The VIX is back up above 25, indicating fear remains elevated, while Gold is steady, holding above $1,230/oz.

Earnings reports continue to push the market in both directions. Yesterday, the positive reaction to earnings from Tesla Motors, Twitter and others helped to spark a rebound. Today it looks like Big Tech results could have the opposite effect, dragging on sentiment as investors reacted negatively to reports from two of the biggest names late Thursday.

Alphabet (Google) fell 5% in aftermarket trading last night. Although EPS beat the street $13.06 to $10.42, sales of $33.7B came in below the $34.0B street estimate, which management blamed on a higher US Dollar. Amazon.com* dove down more than 10% in aftermarket trading last night. EPS beat the street $5.75 to $3.14, but sales of $56.6B was below the $57.1B street estimate, and even more disappointing, Q4 sales guidance of $66.5B-$72.5B was below the $73.8B the street had been expecting.

In both cases, positive past earnings have been ignored with investors focusing more on sales disappointments and guidance. This suggests that even this far into earnings season, investors in many cases are still looking for reasons to reduce positions rather than add to holdings. Whether these stocks continue these losses or rebound may provide a sense of whether bears or bargain hunters have the upper hand. Regardless, it’s clear that rapid readjustments of expectations and valuations in both directions may continue on a stock by stock basis right through to the end of earnings season 3-4 weeks from now.

The US Dollar is rallying on the back of a better than expected US GDP report that came out this morning. The first crack at Q3 GDP growth came in at 3.5% which was down from 4.2% in Q2, but stronger than the 3.3% the street had been expecting, indicating that the US economy remains robust. One thing to keep an eye on, however, is that Core PCE Inflation, a measure the Fed likes to use, increased only 1.6%, below the 1.8% street estimate, under the Fed’s 2.0% long term objective and down from 2.1% last quarter. Although a December US rate hike still looks like a lock, easing inflation pressures could influence how many times the Fed hikes rates in 2019.

*Shares of Amazon.com are held in some portfolios managed by SIA Wealth Management.

 

SIA Wealth in the Media:

Colin Cieszynski was quoted by The Canadian Press today on yesterday’s Canadian stock market rebound.

North American stock markets recovered some of Wednesday’s deep losses

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