A tug of war for market. Big tech earnings ahead + US GDP. Plus watch stocks that have risen 16% since the Gaza attacks
#week ahead ending 23 Oct
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Markets are playing a balancing act and tug of war. Here is what to watch and consider
On one side of the markets, good news is good. Or is it?
1- The market will likely be contending with a round of hotter-than-expected economic news. This week's release of Aussie CPI and US GDP data will test if stronger economic data will push bond yields to new record highs, and in term pressure equities lower; as markets may be forced to reckon with the idea of higher for longer interest rates.
2- Chinese industrial profits, released this Friday, will likely also show the tiger economy is continuing to claw up. The data is expected to complement last week's suite of stronger-than-forecast economic data, showing China seems on track to achieving 5% GDP growth for 2023, even despite China's property sector remaining weak.
3- US reporting season embarks on the biggest week of releases; $15 trillion worth of S&P500 companies report results this week. Results are expected to show businesses are mostly coping with rising costs, salaries and increased fuel prices. While pain might be felt in Ford and General Motors amid striking workers. And UPS may address how it will deal with higher wage pressures. While the focus will be on future spending and investment in AI by Microsoft and Alphabet.
- On Tuesday Google$Alphabet-A(GOOGL.US)$ , Microsoft$Microsoft(MSFT.US)$ , Coca-Cola$Coca-Cola(KO.US)$ , General Motors$General Motors(GM.US)$ , General Electric$General Electric(GE.US)$ and Snap$Snap Inc(SNAP.US)$ report.
- On Wednesday, Meta$Meta Platforms(META.US)$ , Boeing$Boeing(BA.US)$ and IBM$IBM Corp(IBM.US)$ results are out.
- On Thursday, Ford$Ford Motor(F.US)$ , Amazon$Amazon(AMZN.US)$$United Parcel Service(UPS.US)$ and United Parcel Services will be on watch.
- On Friday energy giants Chevron$Chevron(CVX.US)$ , Exxon$Exxon Mobil(XOM.US)$ , and Phillips 66$Phillips 66(PSX.US)$ report.
On the other side of markets, there is a lot of risk on the table
1- Markets await news that one of China's biggest builders (Country Garden$COUNTRY GARDEN HLD(CTRYY.US)$ ) will likely default on a US dollar bond for the first time; as Chinese developers remain starved of cashflows as property investment and residential property sales continue to fall.
2- The world also remains on high alert with geopolitical tension picking up and the 'next phase' of conflict to potentially be extended to Syria and Lebanon.
3- Investment managers will also likely continue to trim 'fat profits' from tech stocks that have had a cracking year and in turn, put some of those profits into capital-stable assets (bonds), as the world grapples with uncertainty.
- So watch if the 'boring' US 10-year Government bond yield hits 5% again, which is the highest yield in 16 years. Why is that important for you to watch? Well each time bond yields rise, equities fall. Why? Well, the cost of capital rises. And on top of that, the ‘boring’ US government bond, offers an 'attractive' yield. It's currently paying a higher yield, than the 3 major US indices combined. And that same 5% US bond yield is also paying a higher yield than the overall ASX200’s dividend yield of 4.4%. So, for as long as boring bond yields are as high as they are, we will likely see professional money flow into bonds.
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Potential trading and investing considerations
1- Should geopolitical tension pick up and US GDP data blow hot, consider there will likely be wild volatility.
- Be on guard for a potential pullback before markets coil higher. The technical indicators for the S&P500 are bearish; The S&P500 has fallen below its 200-day moving average, which is a bearish symbol to some technical analysts. Plus the market's 'fear gauge' the VIX index, has risen to its highest since March, when the SVB collapse.
- But, be mindful that if markets do fall further, they’re likely to whipsaw higher as the S&P500's technical indicators appear to be oversold territory and yet corporate America's largest 500 companies have so far reported positive earnings results, with earnings beating expectations. Plus, importantly forward earnings are expected to see a huge recovery and surge 21% over the next 12 months. This is largely thanks to the resilience of the US consumer, while the market is also hoping the Fed will cut interest rates as early as next July 2024.
2- Pay attention to stocks and sectors that are rising, despite the tension in Gaza picking up on Oct 7.
- Since the attacks the major US indices have fallen with the S&P500 losing 1.9%, the Nasdaq shedding 2.8%, while Australia's ASX200 has lost 0.8%; with airlines and travel companies seeing profit-taking after oil prices surged.
- Oil companies have dominated the leaderboard after the oil price jumped 6% since tension rose. Shares in Marathon Energy$MIDWEST ENERGY EMISSIONS CORP(MEEC.US)$ rose 16%, leading energy names APA, Hess and Diamondback Energy.
- Defense stocks are also charging, such as Northrop Grumman$Northrop Grumman(NOC.US)$ , and Lockheed Martin$Lockheed Martin(LMT.US)$ up 15% and 11% as their forward orders are surging.
- And gold stocks are shining, after the gold price surged 8% since the Gaza attacks. De Grey Mining$De Grey Mining Ltd(DEG.AU)$ , Silver Lake Resources$Silver Lake Resources Ltd(SLR.AU)$ , West African Resources$West African Resources Ltd(WAF.AU)$ , and Newcrest Mining$Newcrest Mining Ltd(NCM.AU)$ shares have gained 16-12%.
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Author
20 Oct 2023