A string of big US earnings this week will set the tone for trading with Netflix, IBM, Intel, P&G, Johnson & Johnson and AMEX due to report. So far the early earnings release have set a solid start of Q4 as more than 70% of the S&P 500 components have beaten estimation.
US market is shut for Martin Luther King’s day on Monday, and the economic calendar is relatively quiet.
On the forex front, traders are eyeing interest rate decisions from Bank of Japan on Tuesday, Bank of Canada on Wednesday, the European Central Bank on Thursday and US inflation data on Friday.
Markets ended last week with an upbeat tone, as a phase-one trade deal cleared the trading atmosphere and major US banks delivered positive earnings surprises. Focus shifted to the strength of underlying fundamental elements, with Q4 earnings season set to face a ‘reality check’ to match the robust stock market rally seen in the past three months.
The Fed’s three rate cuts and balance sheet expansion last year have fuelled a 29% rally in the US stock market, although corporate America showed little growth in their profits. This has pushed their forward multiples of price to earnings ratio to nearly 19 times from 14 times throughout 2019. This simply means that the stock market is getting more and more expensive and underscores its vulnerability against any short-term pullback should earnings guidance miss.
Among the sectors, energy and consumer discretionary are expected to end the year with a dismal drop in profits at 37% and 14% year-on-year respectively. This is largely contributed by low oil & gas prices, an automobile downturn and falling brick and mortar retail businesses. Big technology firms are expecting a 2% drop in Q4 EPS, but it is always their forward guidance that drives the market. For the year ahead, analysts expect a strong turnaround in technology firms’ earnings, with earnings growth of 9% and revenue growth of 4%.
Gold – price has been consolidating at around US$ 1,552-1,560 these days against the backdrop of US-China trade truce and fading geopolitical tensions. Gold traders will keep their eyes on the World Economic Forum at Davos this week for any clues of US-EU trade issues as President Trump delivers a speech on Tuesday. Immediate support level can be found at US$ 1,543 area (SuperTrend 10, 2).
Crude Oil – Brent oil price has rebounded last week to US$ 66.2 area, but the upside might be capped by sluggish China GDP figures from last week and a trade deal in which energy export is highlighted between US and China. China left tariffs on US fuel imports unchanged in response to US’s refusal to remove tariffs on $360 billion Chinese goods. And most of the purchase China committed to make are in 2021, which leaves plenty of room for any recurrence of tensions and this could dampen sentiment on oil trading.