Earnings Season Looms Amid Uncertainty
Oct 9, 2023
As global tensions simmer and financial uncertainties loom, it's crucial to assess the current state of the markets and understand the driving forces behind their movements. This blog post delves into the recent developments and potential market catalysts for the upcoming week.
The world faces a multitude of geopolitical challenges, including conflicts in the Middle East and Ukraine, an impending government shutdown and the absence of a speaker of the house in the U.S. House of Representatives. Concurrently, we are witnessing the impact of rising interest rates, which is reshaping the financial landscape. Despite this tumultuous backdrop, the markets have managed to maintain a degree of stability.
In premarket activity, the S&P 500 futures are down slightly by just over 0.5%, while Nasdaq futures dipped 0.8%. This suggests markets are cautiously monitoring the evolving geopolitical and economic landscape.
The previous week saw an interesting turn of events in response to a stronger-than-expected jobs report. Initially, stocks faced a sell-off, but they quickly rebounded and not only recovered their losses but also surged higher. The S&P 500 recorded a significant gain of 1.2% for the day and 0.5% for the week, marking an end to a four-week losing streak. Similarly, the Nasdaq Composite closed higher by 1.6% for both the day and the week. However, both indices remain below their July highs by 6.5% and 7%, respectively.
Beneath the surface of market performance lies a more nuanced reality. According to a Bloomberg report, more than 180 stocks in the S&P 500 are now trading below their values from a year ago, and 267 stocks in the index are down year-to-date. This highlights a concerning trend: the market's gains are heavily concentrated in a select few stocks.
The coming week presents a series of potential sources of market volatility and focus. Key Federal Reserve members are scheduled to speak with investors eagerly awaiting any clues regarding the central bank's intentions for the November meeting. Additionally, significant economic reports are on the horizon, including the producer price index (PPI) and consumer price index (CPI) scheduled for release on Wednesday and Thursday, respectively. Friday will mark the beginning of earnings season, with banks leading the way.
Oil prices have risen by a little more than 4% in premarket trading, primarily in response to developments in the Middle East. While this spike is notable, crude oil remains below the $90/barrel threshold, hovering just above $86/barrel. Nonetheless, this situation warrants attention, as the recent decline in oil prices has helped alleviate some inflationary pressures.
Amidst uncertainties, a "flight to quality" is often observed, where investors seek refuge in assets like bonds and commodities such as gold. In premarket trading, gold has risen by nearly 1%, while bonds have seen a more modest increase of 0.5%. This muted bond movement may be attributed to concerns about inflation and the fact that cash markets are closed, often dampening futures market movements.
Several individual stocks are worth monitoring in the upcoming days. Bristol-Myers Squibb's announcement of its acquisition of Mirati Therapeutics for $58 per share is noteworthy. Defense stocks are expected to trade higher, particularly in the opening hours because of ongoing geopolitical tensions. Additionally, developments in the automotive industry, including progress in resolving recent strikes, are worth tracking.
Volatility, as measured by the VIX, has surged by nearly 9% in premarket trading, reaching 19. While this represents a significant increase, 19 is not considered a high value. However, escalation of the situation in the Middle East could lead to higher volatility. Investors should also consider "skew," which reflects market perceptions of risk direction. Skew often favors puts over calls, implying concerns about sudden price drops. This may result in relatively expensive put options compared with call options. For options traders, this presents opportunities to sell puts in beaten-up stocks or adjust hedging strategies.
In these challenging times, it's crucial to stay informed and maintain a long-term perspective. Geopolitical turmoil and economic uncertainties will continue to shape market dynamics. As always, it's advisable to adhere to your investment plans and long-term objectives, while remaining vigilant and adaptable in the face of evolving market conditions.
JJ Kinahan is CEO of IG North America—which includes tastylive, tastytrade and IG's FX Business. Kinahan traded for 21 years at the Chicago Board Options Exchange. He serves on the CBOE Advisory Board and the SIFMA Options Committee. @thejjkinahan
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