Netflix reports after the bell

By David Morrison  |  17/01/2019 15:43

The major US stock indices erased early losses soon after the open. Investors are looking ahead to Netflix earnings, having shrugged off disappointing numbers from Morgan Stanley

There was a modest pull-back in US and European stock indices in early trade on Thursday. In the previous session the S&P 500 hit its highest level in a month and retested resistance just below 2,630. This marks the 50% retracement of the October-December sell-off. The index slipped back below 2,600 ahead of the US open but then rallied back into positive territory soon after. This was despite a disappointing set of earnings from Morgan Stanley which saw the stock fall over 6% in early trade. Investors chose to ignore yet another weak result from the banking sector, instead looking ahead to Netflix which will report after tonight’s close. Shares in the streaming giant have been on a tear recently, and even made a daily gain of 6% after the company announced sharp subscription increases earlier this week. Good numbers tonight should encourage investors to increase their exposure to equities, while any disappointment has the potential to cause widespread stock market damage. Analysts expect fourth quarter Netflix subscriptions to have risen by 1.8 million in the US, and by 7.6 million internationally. They also expect earnings per share of $0.89 on revenues of $9.35 billion.
 
Fed’s Beige Book
 
Last night the Fed released its Beige Book. This is a summary of economic conditions across the 12 Federal Reserve bank regions. The main takeaway was that: “Outlooks generally remained positive, but many districts reported that contacts had become less optimistic in response to increased financial market volatility, rising short-term interest rates, falling energy prices, and elevated trade and political uncertainty”. The report also showed that manufacturing and energy expanded at a slower pace in most districts, while non-financial services cooled in a few districts.
 
Fed to pause?
 
The report would appear to support comments made by Federal Reserve member Esther George earlier this week who said that: “A pause in the normalization process would give us time to assess if the economy is responding as expected with a slowing of growth to a pace that is sustainable over the longer run”. Ms George, like her boss Jerome Powell, was until very recently lauding the strength of US economic growth. Investors have interpreted recent statements from Fed members as indicating that the US central bank will now take a break from hiking rates and may even consider pausing its balance sheet reduction programme.
 
More stimulus?
 
But it isn’t just the Fed that has suddenly switched from hawkish to dovish in the space of a few weeks. Just over a month ago the European Central Bank (ECB) confirmed that its monthly bond purchase programme would come to an end in December 2018. Despite this, the ECB’s balance sheet has increased since then. On top of this, the People’s Bank of China (PBOC) is currently engaged in a massive injection of liquidity into its financial markets (1.14 trillion yuan ($17 billion) so far, and close to a record). The official excuse for this move was to keep sufficient liquidity in the banking system during the peak season for tax payments and ahead of the Lunar new year. But many analysts believe that Beijing is really responding to the significant economic deterioration in the country which is becoming increasingly evident with each new data release.

Crude oil update

There’s two ways of looking at the behaviour of crude prices over the past week. Firstly, we could say that WTI is consolidating above support around $50.50 and preparing for another leg higher. Alternatively, it could be that the recovery over the past three weeks has run out of steam and it won’t take much to lead to a break of this support and see prices take another leg down. Looking at the chart there’s some attractive symmetry as we see the significance of the $50.50 level which acted as support between November and December last year. That level has subsequently been revealed as the 23.6% Fibonacci Retracement of the October-December sell-off. Time will tell if it will also prove to be the right-hand shoulder of an inverted head and shoulders pattern. If so, then technically at least, it would support the theory that oil prices are set to recover further. The low of the inverted head comes in around $42.50 with the neckline around $54, giving us a difference of $11.50. If this is a head and shoulders, then that implies an upside target of $65.50 or so ($54 plus $11.50). The alternative is a break of support which could quickly see WTI revisit December’s lows. From a fundamental point of view, we have the usual questions over supply and demand playing into the current uncertainty. Yesterday the Energy Information Administration (EIA) reported that US crude production hit a fresh record high of 11.9 million barrels per day (bpd) last week, confirming the US as the world’s largest producer. While this weighs on prices, it is being offset to some degree by the output cut agreement made at last month’s OPEC meeting. Saudi Arabia and non-OPEC member Russia are leading efforts to cut supplies by 1.2 million bpd, but progress has been limited so far. Meanwhile, investors and traders are also concerned about the outlook for future demand growth. Evidence of slowing global economic growth suggests that demand may fall going forward. If so, this should keep a lid on prices over the coming months.
 
 
 
 
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