Analyst Articles – Forex News 24

Q3’19 Euro Forecast Sees Economic, Political Uncertainties Back on the Rise
S&P 500, Dollar and Gold Show What the Key Theme Is Next Week
Will Global Growth Fears Overwhelm OPEC?
Gold Volatility Builds as NFPs Reminds Us Of the Primary Catalyst
Gold Outlook Bullish on Imminent Fed Rate Cut
S&P 500 Returns When the Fed Cuts Rates
VIX Signals Complacency as S&P 500 Tags Record
Key Facts to Know & Why it is Important for the Stock Market Outlook
Retail Trader data shows 79.5% of traders are Net-Long
Gold Price Double Top Takes Shape after June US NFP Report

Q3’19 Euro Forecast Sees Economic, Political Uncertainties Back on the Rise

Posted: 06 Jul 2019 01:17 AM PDT

Political Pressure is on the Rise Again

There are two significant political issues in play for the Euro at present time that will garner more attention over the coming weeks and months. First, how does the relationship between Italy and Brussels evolve? The Italian government continues to be a thorn in the side of pan-European policymakers (especially as concerns grow that its new debt offering could be akin to a parallel currency to the Euro) and will likely stymy any significant fiscal policy changes. Second, will the EU revoke Switzerland's preferential treatment for its stock exchanges? There could be ramifications for Brexit (e.g. the EU won't treat the UK different than it treats Switzerland and vice-versa).

The next president of the European Central Bank will be decided in the coming months. Outgoing ECB President Mario Draghi has a complicated history in office, having saved the Euro from dissolution but failing to get the Eurozone over the low growth hurdle in the wake of the Global Financial Crisis. Politics is very much in play here, with French President Emmanuel Macron clearly lobbying against former German central banker Axel Weber, going so far as to extend an olive branch to noted hawk and Bundesbank president Jens Weidmann (a key opponent to QE and low rates in years past; he has since recanted those views). Read the full preview on the next ECB president.

Euro Technical Outlook Inconclusive

Euro technical positioning looks inconclusive at the mid-year mark. Breaking above resistance at the top of a bullish Falling Wedge chart formation on the bellwether EURUSD exchange rate offered a brief glimmer of hope for an upside reversal, but follow-through failed to materialize. The pair swiftly slumped back below the boundaries of the breakout, settling into a choppy range.the monthly chart offers a stark reminder that any such moves will probably prove to be short-lived. It puts prices within the bounds of a well-defined, structural downtrend guiding EURUSD

lower for over a decade. The latest leg of the decline was apparently triggered in October 2018 with a break below range top resistance-turned-support dating back to the first half of 2015.

EUR/USD Price Chart: Monthly Timeframe

This barrier has been recast as resistance in the 1.1449-1.1554 area once again. The next big layer of support is in the 1.0459-1.0563 zone. Prices spent nearly two years oscillating between these thresholds previously, so seeing more of the same here now is not terribly surprising. Still, it would take truly explosive gains bringing prices well north of 1.20 to make the case for true bullish trend change.

2019-07-06 08:00:00

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S&P 500, Dollar and Gold Show What the Key Theme Is Next Week

Posted: 05 Jul 2019 08:22 PM PDT

Volatility Talking Points:

Market’s experienced an unexpected jolt of volatility through the end of this past week, helped along by a robust June NFPs
The S&P 500’s gap lower on the day’s open despite robust jobs figures in particular should raise serious concern
Fed Chair Powell’s testimony and the BOC decision may draw more interest than Eurozone and UK growth readings

What do the DailyFX Analysts expect from the Dollar, Euro, Equities, Oil and more through the 3Q 2019? Download forecasts for these assets and more with technical and fundamental insight from the DailyFX Trading Guides page.

NFPs Gives the S&P 500 a Start, Connects Two Key Themes

If we stuck to tradition, this past week’s final 48 hours would have been a practice in low-liquidity creeping. Instead, there was a remarkable amount of volatility through Friday which may serve as evidence as to what is most pressing for the markets when it comes to both trend and tempo moving forward. The spark was the US June employment report. The jobless rate unexpectedly ticked up to 3.7 percent but was coming off a multi-decade low. Similar caveat goes to the average hourly earnings which was unexpectedly unchanged but still robust at 3.1 percent year-over-year growth. It was the net payrolls change that really seemed to land a serious impact. The 224,000 jobs added handily beat the 160,000 forecast and seemed to hit two key fundamental themes that have competed for the market’s attention these past months: growth concerns and monetary policy.

Chart of Historical US NFPs and Difference of Actual and Forecasts (Monthly)

The employment report for the world’s largest economy naturally has clear implications for the global assessment of economic growth. A strong net change in jobs adds a modest upgrade to an already encouraging backdrop for expansion. And yet, that isn’t how the S&P 500 and other risk assets would initially interpret the news. The benchmark equity index opened to a hearty gap lower on the New York open Friday – the biggest gap down since the end of May – which contrasts a supposedly easy path of continuation given the indices are already at record highs. Instead, it seems that the data would trigger a pang of fear that the Fed won’t offer as much support as the market had aggressively priced over the past few months. From a peak forecast for 74 basis points of cuts priced through year’s end, the December Fed Funds futures contract is pricing in 54 bps worth of support. When a market shows greater deference for temporary – and limited – stimulus over genuine growth, traders should be mindful.

Chart of S&P 500 and December Fed Funds Futures Contract (Daily)

S&P 500, Dollar and Gold Show What the Key Theme Is Next Week

If We Are Focusing on Monetary Policy, Watch the Dollar and Loonie

A preference for – even worse, dependence on – monetary policy to carry markets higher would reflect a dangerous environment. Dependence on external factors is not genuine strength and eventually the temporary enthusiasm will pass to leave a reality of tepid growth. In this environment, it would not be wise to take complacency at face value when it comes to propping up asset prices to such rich levels relative to value. In the meantime, if monetary policy is the focal point, the Dollar may be one of the best assets to keep tabs on as a reflection of the entire market. For the Greenback, there is a notable skew in response to the Fed’s policy. There was a notably controlled response to the climb in rate forecasts through the second and third quarters of 2018, but the incredible reversal in rate forecast for this largest central bank has clearly evoked a comparatively small response from the currency. With considerations of relative policy standing to the likes of the ECB and BOJ, this can be a convoluted driver for the Greenback overall.

Chart of DXY Dollar Index and Rate of Change (Daily)

S&P 500, Dollar and Gold Show What the Key Theme Is Next Week

In contrast to the Dollar’s conflicted fundamental response to monetary policy, gold’s reference may prove far more straightforward. When it comes to rates and unorthodox monetary policy around the world, more accommodation equates to greater appeal to the ‘alternative to traditional currency’. As such, whether the Fed is due to cut rates only two times in 2019 (as December FF futures suggests now) or three times doesn’t materially alter the appeal of the commodity. The fact that the world’s largest central bank is pursuing policy similar that of its European and Japanese counterparts only furthers a global environment where the largest sovereign assets (currency and debt) are unnaturally devalued. Where else can capital find stability outside of these most influential currencies?

Chart of Gold and Fed Funds Futures December Contract (Daily)

S&P 500, Dollar and Gold Show What the Key Theme Is Next Week

When it comes to monetary policy for the week ahead, the US has quiet a bit on tap to stir the theme back to life. The market’s favorite inflation figure (CPI) will compliment the FOMC minutes and a range of Fed speeches that are on tap. That said, the top listing in this vein is undoubtedly Fed Chairman Jerome Powell’s testimony before the House and Senate. Expect as much inquiry into the President’s pressure on the institution as his forecasts for economic health. Yet, if you are looking for the most concentrated monetary policy event on the economic calendar for the majors for the week ahead, it is without doubt the Bank of Canada (BOC) rate decision. The market sees little chance that the central bank lower rates at this meeting, but there is a nagging forecast of a cut eventually in 2019 – as there is with nearly every major group. The Canadian jobs and manufacturing activity data this past session seem to add depth to this debate. Headline jobs in Canada dropped 2,200 position, but it was all part-time while wage jumped a whole percentage point. The Ivey manufacturing activity report offered few positive details with its drop from 55.9 to 52.4.

Chart of USDCAD and Daily 'Tails' (Daily)

S&P 500, Dollar and Gold Show What the Key Theme Is Next Week

Euro and Pound Face Fundamentals More Likely To Moor

Outside the most capable listings relative to active themes, there is good reason to watch other majors for fundamental influence. The Euro was relatively steady through the past week between an extremely dovish monetary policy outlook and the favorable turn in financial risk as Italy’s confrontation with the European Union seemed to de-escalate when it was reported that they would not pursue a debt procedures against the spendthrift country. Yet, if we move beyond these dramatic headlines, the more mundane updates on health offers unmistakable reason for pause. There is an unmistakable cooling in economic health for Europe. We were reminded of that fact this past session when Germany reported factory orders dropped 2.2 percent this past month (for an -8.6 percent pace year-over-year). In the weak ahead, we have German trade and industrial production, Euro-area investor sentiment, the Finance Ministers meeting and ECB minutes.

The Sterling offers the exact contrast to its shared counterpart. Where the Euro’s allegiance for market influence is unclear thanks to a wave of important themes, the Pound has one focus: Brexit. Despite the one-track mind, the course of the divorce seems to be more and more convoluted with each week. On Friday this past week, front runner to take over the Conservative Party leadership from Theresa May – and therefore the next Prime Minister – Boris Johnson said the country would be ready for a no-deal Brexit by the October 31st deadline if they had to resort to the option. Meanwhile, there are reports MPs are attempting to legally gain control of Parliament so they can preclude such divisive outcome, but it is all being fought out with little anticipated time left for genuine negotiation between the UK and EU. The outcome is up in the air but uncertainty is risk. As such, the Pound continues its plunge versus major counterparts with little regard to technical levels. That said, there is far less potential for mounting a renewed bear trend from here than sparking a bullish reversal. We discuss all of this and more in this weekend Trading Video.

Chart of EURGBP (Daily)

S&P 500, Dollar and Gold Show What the Key Theme Is Next Week

If you want to download my Manic-Crisis calendar, you can find the updated file here.

2019-07-06 02:13:00

Will Global Growth Fears Overwhelm OPEC?

Posted: 05 Jul 2019 07:09 PM PDT

WILL SLOWER ECONOMIC GROWTH & TRADE WARS DRAG CRUDE OIL PRICES?

Since Q2, oil prices have fallen a little over seven percent, considerably less than the 30-plus percent climb they experienced at the beginning of the year. Rising concerns about the pace of global economic growth is pressuring WTI as inventories bulge while many central banks are halting – and in some cases entirely reversing – monetary policy normalization and their rate hike cycles hoping to shore up weakening fundamentals.

Decelerating GDP growth out of powerhouse economies like China, the EU and US may continue to weigh on oil demand and prices. In Europe, ECB policymakers have recently concluded a symposium in Sintra, Portugal where central bank President Mario Draghi alluded to possible future rates cuts and the re-introduction of QE. Slowing economic growth and inflationary pressures in Europe have been lagging while expectations for price growth remain unfavorable.

Demand for oil which mirrors slowing GDP growth out of these economies has created a supply imbalance and looks to keep crude oil prices under pressure. Oil price weakness threatens to be exacerbated by US Department of Energy (DOE) reports detailing that total crude production is increasing along with inventories. Additionally, the number of oil rigs in use has fallen and demonstrates that production efficiency is increasing. If US crude oil producers decide to open up the spigot and increase operational capacity, crude oil prices may plummet further.

OIL PRICE CHART VOLATILITY THREATENS TO DRAG CRUDE LOWER

With crude being strong-armed by both bullish and bearish headwinds, oil price volatility (measured by Cboe's OVX Crude Oil Volatility Index, shown inverted) risks rising which possibly suggest weakness in WTI ahead due to the generally strong negative relationship between the two assets. The daily chart also reveals that an impending death cross of the 50-day and 200-day SMAs threatens to keep crude oil prices subdued.

If market sentiment sours at technical resistance near the 61.8 percent Fibonacci level, confluence around $54.00 per barrel and the 50.0 percent retracement of crude's year-to-date trading range has potential to keep oil prices bid. Moreover, forthcoming weakness in crude is perhaps hinted at by fading momentum shown by the downtrend in oil's 14-day relative strength index (RSI). Crude oil might sink toward support at the $52.00 level if the longer-term bullish uptrend from the December 2018 low fails to bolster prices. Conversely, upside could target $62.00 and the 78.6 percent Fib before eyeing the $66.00 per barrel price level again.

OIL TRADING RESOURCES

— Written by Dimitri Zabelin and Rich Dvorak, Junior Analysts for DailyFX.com

Connect with @ZabelinDimitri and @RichDvorakFX on Twitter for real-time market insight

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2019-07-06 02:00:00

Gold Volatility Builds as NFPs Reminds Us Of the Primary Catalyst

Posted: 05 Jul 2019 06:33 PM PDT

Gold Talking Points:

US equities gapped lower, Dollar rallied and gold dropped Friday, all charged by the same fundamental catalyst: NFPs
Where equities and currencies were quick to respond, it is gold that has the true capacity to run on monetary policy terms
With an ATR a its highest since Dec 2016 and a series of giant wicks tallying, watch the range from 1440 to 1380

See how retail traders are positioning in Gold, S&P 500 and Dollar-based majorsusingthe DailyFX speculative positioning data on the sentiment page.

The US payrolls for June apparently hit a nerve for the market. A remarkable level of volatility was felt across the financial system with a particular degree of intensity for US equities, the Dollar and Gold. The response matrix from these unique assets suggests the market interpreted a lower probability of the Fed pursuing an aggressive pace of easing through the second half of 2019. Few other viable scenarios would explain the S&P 500 posting a strong gap lower on the New York open, one of the biggest single-day rallies for the DXY in 2019 and yet another enormous daily range (highlighted by an intraday reversal) for the precious metal.

Chart of DXY Dollar Index and S&P 500 in Green (Daily)

My interest in this metal over other key benchmarks is its appeal through various scenarios. For the Dollar and S&P 500, there are multiple competing fundamental issues – trade wars, growth, the effectiveness and intent of other major central banks. All of that can contribute to monetary policy, but these components’ alterations can materially redirect the other market’s response. If the Fed commits to easing but at a slow pace while other central banks dig deeper holes, the US currency can hold steady or even advance. The sentiment that sets the course for equities in the meantime can deem three cuts in 2019 a boon for extending record highs or ‘not enough’, without warning. Yet, for the the precious metal, virtually any measure of easing will translate to traditional currency devaluation.

Chart of Gold Overlaid with Fed Funds Futures December Contract (Daily)

Gold Volatility Builds as NFPs Reminds Us Of the Primary Catalyst

From the charts, we can see the makings of a high-probability break in the near future. The metal has been bouncing aggressively between a bullish extreme around 1440 and bearish floor of 1380. Within that broad $60 range, we have seen sharp large moves and sudden intraday reversals. In fact, the 20-day (equal to one trading month) average true range – ATR – has climbed to its highest level since December 2016. Further, those intraday reversals have created large ‘wicks’ on the daily chart that few technical traders worth their salt would miss. This all adds up to extraordinary volatility. Such a degree of activity cannot reasonably hold a range if it persists. The question then is the direction of this eventual resolution.

Chart of Gold with the 20-Day ATR in Purple and Size of Wicks (Daily)

Gold Volatility Builds as NFPs Reminds Us Of the Primary Catalyst

Gold has been climbing for almost 11 months now. While there have been periods of respite, the general trend has held fast as despite views on risk trends and economic activity making some course adjustments. When it finally cleared 1360, it became very clear as to what fundamental line the market was following. The Fed’s confirmation that it would reverse course on its normalization policies officially meant that the world’s largest central bank were returning to a policy (even if inadvertent) of collective devaluation of their currencies. If the Dollar, Euro, Pound and Yen are all under pressure accounting for approximately 95 percent of all reserves, there is little other alternative besides gold. So, whether the Fed cuts once or 3 times doesn’t really matter to the ultimate trend – though it can certainly adjust pace. We focus on Gold in this weekend version of the quick take video.

Chart of Gold (Weekly)

Gold Volatility Builds as NFPs Reminds Us Of the Primary Catalyst

If you want to download my Manic-Crisis calendar, you can find the updated file here.

2019-07-06 01:07:00

Gold Outlook Bullish on Imminent Fed Rate Cut

Posted: 05 Jul 2019 03:55 PM PDT

Gold took out the 2014 high ($1392) after the Federal Reserve altered the forward guidance for monetary policy, and the price for bullion may continue to benefit from the current environment as the central bank appears to be on track to switch gears over the coming months.

July Fed Meeting Interest Rate Probabilities

Gold Price Q3 Forecast: Gold Outlook Bullish on Imminent Fed Rate Cut

In fact, Fed Fund futures now highlight 100% probability for at least a 25bp rate cut at the next rate decision on July 31. The central bank may show a greater willingness to establish a rate easing cycle as the dot-plot shows the benchmark interest rate narrowing to 1.75% to 2.00% by the end of 2019.

To read the full Gold Price Forecast, download the free guide from the DailyFX Trading Guides page

Gold Price Technical Analysis: Look to Fade Weakness into Q3

Gold prices are testing big resistance into the final week of June trade and while the broader focus is higher in XAU/USD, look for a larger pullback early next quarter to offer more favorable entries while above 1319. Ultimately, we're targeting fresh yearly highs above 1400 in the second quarter before a larger correction.

To read the full Gold Price Forecast, download the free guide from the DailyFX Trading Guides page

Gold Price Weekly Chart

Gold Price Q3 Forecast: Gold Outlook Bullish on Imminent Fed Rate Cut

Chart prepared by Michael Boutros

To read the full Gold Price Forecast, download the free guide from the DailyFX Trading Guides page

2019-07-05 22:00:00

S&P 500 Returns When the Fed Cuts Rates

Posted: 05 Jul 2019 11:35 AM PDT

STOCK MARKET RETURNS WHEN THE FED CUTS RATES – SUMMARY POINTS

Stock market investors are largely expecting Chair Powell and the FOMC to cut rates this July for the first time since December 2008
S&P 500 Index returns are mixed following the start of a Fed rate cut cycle, but recent history and current market dynamics paint a bleaker picture
Download the free Q3 Equity Forecast for comprehensive fundamental and technical analysis on the major global stock market indices

Over the last few months, financial markets have observed a sharp shift in monetary policy outlook from the Federal Reserve (Fed). The US central bank pivoted quickly from a hawkish stance indicated by Chair Powell and FOMC members this past December who previously hinted at 3 rate hikes for 2019 to the current stance of no rate hikes this year. Meanwhile, rate traders are now pricing in a rough 75 basis points of cuts to the Fed's policy interest rate by the end of 2019 which currently stands at 2.25-2.50 percent.

WILL THE FED CUT RATES IN 2019?

Several business cycle indicators – like the yield curve inversion – amid decelerating GDP growth suggests that the global economy is losing momentum quickly and suggest that the latest expansion may be on its last leg. Heightened market risks revolving tariffs and the lingering US-China trade war have also largely driven the stark change in interest rate expectations.

A drastic deterioration in economic data and ballooning market uncertainty has backed the Fed into a corner with little choice but to juice the slowing economy with monetary stimulus. Additionally, this is being hinted at by tepid inflation and fading strength in the US labor market. Now, with the central bank aiming to preserve its dual mandate of stable prices and employment, it appears more likely than not that the Fed will cut rates this year. This is also in consideration of recent commentary from Chair Powell at the June Fed meeting where the head central banker hinted at the FOMC's willingness to act and ease monetary policy – if needed.

HOW DO STOCKS PERFORM WHEN THE FED CUTS RATES?

Historically speaking, stocks tend to benefit from lower interest rates set by the Federal Reserve. This was also pointed out by Goldman Sach's equity strategist, David Kostin, who stated that "if the Fed does cut rates, the S&P 500 usually rallies afterward," adding that "few precedents exist during the past 30 years where futures discounted an interest rate cut 30 days prior to a scheduled FOMC meeting but the Fed did not cut." This relationship can be observed in chart 1 below which depicts the monthly change in the S&P 500 Index and the effective federal funds rate (FFR).

S&P 500 INDEX PRICE AND EFFECTIVE FEDERAL FUNDS RATE OVERLAY – CHART 1

S&P 500 INDEX RETURNS DURING START OF FED RATE CUT CYCLES – CHART 2

For the Fed rate cut cycles beginning July 1995, September 1998, January 2001 and September 2007, the S&P 500 Index posted positive returns of 3.18 percent, 6.24 percent, 3.46 percent and 3.58 percent respectively and is detailed above in chart 2. Although, the S&P 500 Index slid a mere -0.79 percent during the month prior to the start of the Fed rate cut cycle beginning June 1989.

STOCK MARKET PERFORMANCE WHEN THE FED BEGINS TO EASE MONETARY POLICY – CHART 3

While the small sample set limits the ability to make statistical inferences, the variance of S&P 500 Index returns rises dramatically in the 3-months, 6-months, 9-months and 12-months following the start of a Fed rate cut cycle. Looking out a year after the FOMC begins to ease monetary policy, the S&P 500 Index was higher by 12.59 percent, 13.86 percent and 26.13 percent from June 1989, July 1995 and September 1998 whereas the stock market dropped -17.26 percent and -23.61 percent from January 2001 and September 2007.

HOW MIGHT STOCKS PERFORM IF THE FED CUTS RATES THIS YEAR?

It is worth pointing out that the previous Fed rate cut cycles came in response to patch up deflating asset bubbles like the 2001 internet bubble and 2007 housing bubble. Central banks have increasingly tested the limits of easing monetary policy with new unconventional tools such as quantitative easing.

As such, generally-strong equity returns in the month leading up to a Fed rate cut could be explained by the market's hope that the Fed can step in to bolster investor confidence by saving declining asset prices and a slowing economy with looser financial conditions. Also, a reduction in the Fed rate increases the equity term premium and thereby boosts the relative attractiveness of stocks to bonds and other asset classes.

That being said, it is difficult to imagine that the already-diminishing impact of loosening monetary policy can overcome the daunting headwind posed by global trade friction, decelerating GDP and deteriorating equity earnings. If the macro-economy truly needs as much monetary stimulus as markets are currently pricing, investors could be in for a rude awakening when the longest business cycle in history officially comes to an end.

— Written by Rich Dvorak, Junior Analyst for DailyFX.com

Connect with @RichDvorakFX on Twitter for real-time market insight

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2019-07-05 18:00:00

VIX Signals Complacency as S&P 500 Tags Record

Posted: 05 Jul 2019 10:17 AM PDT

Stock Market Outlook:

The VIX trades beneath 13 as the S&P 500 boasts a new record high, does the relationship between the two offer insight on future performance?
Holiday trading hours create prime conditions for Black Swan Events and Stock Market Crashes
Across comparable periods, the relationship between the S&P 500 and VIX is notably weaker in 2019 than in 2018

Stock Market Outlook: VIX Signals Complacency as S&P 500 Tags Record

The S&P 500 rallied on Wednesday as traders leave their desks and markets wind down for the Independence Day Holiday. Due to the conditions, volume has been drained and the potential for a tail-risk event is heightened. Despite the precarious landscape, Cboe's volatility index (VIX) or "fear gauge," is probing 2-month lows.

Data Source: Bloomberg

Over the last two years ending in June, the R-squared measure between the S&P 500 and the VIX has been statistically significant at 64% – but marginally weaker than it was from March to March. In other words, 64% of the movement in the VIX can be explained by a shift in the S&P 500. But over the last month, the dependency of the VIX on the S&P 500 has broken down.

Data Source: Bloomberg

Since June 1, only 36% of the changes in the VIX can be explained by the underlying S&P 500. The relationship is noticeably beneath the longer-term 64% and when compared to the same span in the prior year, the difference is even more drastic – partially due to the number of days in which both the S&P 500 and the VIX climbed.

Data Source: Bloomberg

In June to July 3, 2018, the R-squared value between the two variables reveals that nearly 85% of the movement in the VIX could be attributed to the S&P 500 – a stark contrast to 2019 where the relationship stands at only 36%. One thing to note when analyzing the differences is the sample size. Given the timeframe is just a month, each outlier commands significantly greater influence over the final value. With that in mind, what does the weak relationship between the two mean for the S&P 500 moving forward with the VIX at such depressed levels?

First, one could argue recent weeks have been unusually risk-filled while the S&P 500 pressed to record highs simultaneously. Notable events in the past month include a Fed meeting, an ECB meeting, a Trump-Xi Summit in Osaka, Japan and Iran tensions. Evidently, there has been plenty cause for an elevated VIX – which has failed to materialize.

On the other hand, the average price-moves in June 2019 have been larger than in June 2018 at 0.36% and 0.01% respectively. On an absolute basis, the months offered average moves of 0.53% in June 2019 and 0.41% in June 2018.

Despite the larger on-average price moves in June 2019, the concurrent change in the VIX was smaller than that of the move in 2018. This phenomenon suggests rampant complacency at present, with risky events and large price swings being met with minor movement in the VIX. That said, June 2018 had risk of its own – the advent of the US-China trade war.

At the time, investors were understandably on edge due to the extreme uncertainty brought about by the conflict. In the year since, the market has had time to digest the economic tug-of-war. Regardless, given the holiday conditions and the elevated potential for tail-risk events alongside a fresh record high in each of the S&P 500, Dow Jones and Nasdaq 100 – amid the longest bull run ever – traders should exercise caution and look to reduce risk exposure over the unusual trading hours.

–Written by Peter Hanks, Junior Analyst for DailyFX.com

Contact and follow Peter on Twitter @PeterHanksFX

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2019-07-05 17:00:00

Key Facts to Know & Why it is Important for the Stock Market Outlook

Posted: 05 Jul 2019 09:04 AM PDT

Earnings Season Talking Points:

What is Earnings Season?
Why is it Important to Look at Company Earnings?
Bellwether Stocks
Earnings Recession
Top 10 stocks Across US and Europe

Earnings Season

Earnings season is a period within the year, usually lasting several weeks, where the majority of listed companies announce their latest financial accounts. An earnings report consists of revenues, net income, earnings per share (EPS) and forward outlook, which provides investors with insight in regard to the current health and outlook for the company.

As such, earnings season helps market participants trade the company they are monitoring and the broader index, depending the impact the company has i.e. strong Apple (AAPL) earnings report may see investors buy Nasdaq 100 futures.

When is Earnings Season?

Earnings season takes place a few weeks after each quarter ends (December, March, June, September). In other words, earnings seasons begins around January-February (Q4 results), April-May (Q1 results), July-August (Q2 results) and October-November (Q3 results), with the unofficial start of earning season confirmed when the major US banks report. This typically coincides with an increase in the number of earnings being released, while the unofficial end of earning season is roughly around the time that Walmart (WMT) announce their earnings report.

Why is it Important to Look at Company Earnings?

Corporate earnings are among the most important fundamental drivers of individual stocks and by extension the broader stock market over the long run. Additionally, in the short term, there is not an awful lot that impacts stocks and provides the possibility of large price swings than earnings.

While for the broader index, if the majority of companies within an index, particularly those that a market leader, are reporting earnings that are better than expected, investors typically have a more positive/bullish outlook with regard to not only the individual stocks but also the index. While on the flipside, corporate earnings that underperform expectations would see investors grow more cautious/bearish over the stock market outlook than they otherwise would have been. Consequently, given the importance over earning season, volatility tends to be more elevated around this period.

What to Look Out for During Earnings Season

1. Bellwether Stocks Key to Economic Outlook

When analyzing company earnings, it is important to look out for "bellwether" stocks which can be used as a gauge for the performance of the macro-economy. While the status of a bellwether stock can change overtime, the largest and most well-established companies are typically considered a bellwether stock.

Examples of Bellwether stocks

FedEx (FDX): Ships goods for consumers and businesses across the globe.
Caterpillar (CAT): World's largest heavy-duty maker has been viewed as a bellwether given its large exposure to construction, manufacturing and agricultural industries, particularly in China.
3M (MMM): Gauge for the health of the manufacturing sector.
Apple (AAPL): Among the world's largest company. Important for key suppliers, in particular, chipmakers.

2. Earnings Recession

An "earnings recession" is characterized as two consecutive quarters of y/y declines in company profits. However, while earnings are an important factor in stock market returns over the long term, an earnings recession does not necessarily coincide with an economic recession. The chart below shows that in the past six earnings recessions witnessed in the US, only two had coincided with an economic recession.

Source: Thomson Reuters, DailyFX. Red circles = earnings & economic recession. Blue Circles = earnings recession without economic recession.