Morning Trading Notes Feb 2: Cryptocurrency collapse; stocks stumble between Apple Earnings and nonfarm payrolls

February 2, 2018, 6:35 am EDT

There has been a lot of capital rotation across world markets overnight, sparking a number of big moves. Stock markets are getting hammered again with US indices losing about 1.0%. The Dow is down 250 points and trading back under 26,000 while the S&P 500 has dropped back to 2,800. There appear to be three main forces driving trading today, reaction to last night’s earnings reports, rising US treasury yields and speculation ahead of today’s nonfarm payrolls report.

We continue to see mixed reactions in the markets to earnings reports. While some companies have rallied on positive news, these moves have been short-lived and more often than not, we have seen profit taking against earnings news, particularly this week with the overall market starting an overdue correction.

Late Thursday, Apple posted a stellar quarter, beating the street on multiple metrics including EPS ($3.89 to $3.86), sales ($88.3B to $87.3B). Unit sales of iPhones came in below expectations (77.3M vs 80.0M) and worse, the company guided next quarter’s sales below street estimates ($60-62B vs 65.7B). Apple did not, however, inflict the big iPhone X production cut that had been rumored, which could soften the blow. AAPL shares bounced around in the aftermarket initially but have managed to climb as time has gone on. It’s important to note that Apple had sold off ahead of the report, indicating that expectations had already come down so gains would be more of a trading bounce to claw back losses, not powering forward.

Amazon.com shares soared 6% overnight as the online retailer’s results continued to amaze investors. The company earned $3.75 per share on sales of $60.5B which beat the $59.8B street estimate. Earnings were boosted by a tax gain so are not comparable to the $1.85 street estimate. These results include the Whole Foods acquisition but nothing substantial from the company’s planned move into the health care space. For next quarter, Amazon expects to generate $47.75 to $50.75B in sales around the $48.6B the street had been expecting. The shares had dropped 4% in Thursday trading so it will be interesting to see if they can break out to a new high on this news, with the key test being $1,472.58.

Alphabet (Google) shares fell 3% overnight as the company’s earnings per share of $9.70 came in below the $9.98 street estimate. Sales of $32.3B beat the $31.8B the street was expecting but a big jump in traffic acquisition costs appears to have spooked traders.

The second big factor driving US trading today is rising treasury yields with the 30-year yield breaking out over 3.0% today. With Fed Chair Yellen’s last FOMC meeting over, focus is now shifting to the potential for a more hawkish Fed under incoming Chair Powell. While the Fed is generally expected to raise rates three times this year, Powell may come under pressure to accelerate rate hikes. The FOMC statement this week indicated expectations of rising inflation pressures. Even in the market correction today, WTI is holding $65 and Brent crude is near $70. Positive economic data out of the US this week including stellar ADP payrolls (234K vs street 185K), ISM Manufacturing PMI (59.1 vs street 58.8) and Construction Spending (0.7% vs street 0.4%) give the Fed scope to raise rates at a faster pace.

The next big US economic indicator is nonfarm payrolls which are due at 9:00 am EST today. The street is expecting job growth of 180K up from 148K last month. The nonfarm numbers are running way short of ADP, however, so I think we could see a 240K headline increase and perhaps an upward revision to last month unless the threat of a government shutdown has slowed hiring in the public sector.  Canadian jobs come out next Friday.

Rising treasury yields have shored up support for the US Dollar and appears to have kicked off significant capital flows across many asset classes. The biggest move by far has been the outright collapse of cryptocurrences as their bubble bursts. Bitcoin is down 10% today plunging toward 8,000 while Ethereum is down 17% today plunging toward 800. Cyrptocurrency markets are learning that small markets catching the attention of the fast money can be a blessing and a curse. It was a great party when hot money was pouring in late last year but now the party is over and the breaks of 10,000 and 1,000 respectively this week have opened the floodgates to panic selling as everyone heads for the exits at the same time. In addition to increased regulatory scrutiny, the $500 million theft at Japan’s Coincheck exchange has attracted the attention of authorities and made traders acknowledge that cryptocurrency markets are not as secure or mature as trading on established exchanges. These markets are likely to remain volatile in both directions for quite some time as the stampede phase plays out but it’s still too early to think about combing through the wreckage as there’s likely a lot more downside to come.

This article is intended as general market commentary, based on sources considered to be reliable but could contain unintended errors. Commentary, estimates and charts are provided for information, education and entertainment purposes. They are not as and should not be construed in any way as investment advice. The authors assume neither liability nor credit for returns from readers’ trading or investment activity. We do not accept any remuneration from companies mentioned in this report. The authors or related parties may enter or exit short term trading positions in markets mentioned in this report at any time without notice. Some of the charts used in this commentary are based on Forex and Contracts for Difference (CFD) markets; leveraged products which carry a higher degree of risk and may not be suitable for all investors. CFD trading is not available in the United States of America. Copyright 2018 The Fundamental Technician, all rights reserved.

 

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