Trading Earnings, Inflation, and Covid-19

10/30/2020 10:01 am EST

Focus: COMMODITIES

Bill Baruch

President and Founder, Blue Line Futures

The S&P 500 (SPX) traded to a low of 3226 overnight, testing unchanged on the year at 3231, before paring losses to near unchanged by the onset of US hours. Risk assets are experiencing healthy and expected volatility given the surrounding circumstances, states Bill Baruch of Blue Line Futures.

E-mini S&P (December)

Yesterday’s close: Settled at 3302.25, up 38.75

NQ, yesterday: Settled at 11,342.75, up 210

Fundamentals: More than one third of the companies in the S&P, representing near half of its total market cap, reported earnings this week. Although the punch bowl did not disappear, it took a timeout after Coronavirus Aid talks in Washington stalled and the Senate adjourned ahead of the election. New lockdowns and restrictions are being announced in Europe and the US due to a record rise in Covid-19 cases. Considering all the above and what 2020 has brought to the table ahead of a historical election, is it really all that surprising to see the S&P test unchanged on the year?

Four of the five largest companies in the S&P reported earnings after the bell yesterday. Apple (AAPL), the largest, is down more than 3% premarket. Although the company topped headline estimates for its fourth quarter, iPhone sales fell short of expectations down 20.7% YoY. Furthermore, the failure to give guidance for its Q1 certainly left the market underwhelmed. Amazon (AMZN) is down about 1%; although the company crushed expectations, a wide range of guidance and broader market conditions are bringing the stock in a bit. Facebook (FB) has chopped around and is also down about 1% premarket. Despite beating estimates, the company reported a drop in users from the US and Canada. Last, but certainly not least, Alphabet (GOOGL) was the darling of the dance. The company blew expectations out of the water, led by a surge in advertising revenue growth. The stock is up nearly 10% ahead of the open.

Both Chevron (CVX) and ExxonMobil (XOM) are on the earnings calendar this morning. The stocks are holding ground after reporting less of a loss than expected due to cost-cutting initiatives. Additionally, Exxon CEO Woods pointed to protecting the dividend.

Two big movers ahead of the bell are Twitter (TWTR), down 15% after reporting yesterday, and Under Armour (UAA), up 7% after reporting this morning. AbbVie (ABBV), Honeywell (HON), and Phillips 66 (PSX) are among others to report this morning.

On the economic calendar, GDP data out of the Eurozone was better than expected. This comes a day removed from ECB President Lagarde signaling more stimulus is coming. Also, on the heels of better German Unemployment and Eurozone Confidence data yesterday. Furthermore, this morning although Eurozone CPI data contracted -0.3% YoY, the MoM reads showed a stable uptick.

Domestically, we look to the Core PCE Index. The Fed’s preferred inflation indicator is due at 7:30 am CT and is accompanied by Personal Spending and Income data. Chicago PMI is out at 8:45 am CT and final Michigan Consumer data for October follows at 9:00 am CT.

Technicals: Price action whipsawed late yesterday by rallying ahead of the close and reversing sharply upon settlement and thereafter. That rally though, for the S&P, stalled directly at our first major three-star resistance level at 3329-3330.50 with a high of 3333.75. The NQ traded to a high of 11,457 and fell shy of landmark resistance at 11,539-11,588. Yesterday we said we must see a close above each of those levels to invite a bullish wave. The tape could not, and thus failed. The sharp drop in the S&P tested major three-star support.

Crude Oil (December)

Yesterday’s close: Settled at 36.17, down 1.22

Fundamentals: Crude oil traded in a 3% range overnight. Covid-19 fears and lockdowns are steadily weighing on the demand landscape. Despite strong technical support in which the market responded yesterday, the sellers will likely carry an edge into the weekend given mounting virus uncertainties coming out of it. Barring a broad improvement across risk assets of course. Better GDP data from the US yesterday and the Eurozone today has ultimately been offset by such virus uncertainties coupled with anticipation of the US election next Tuesday. Still, the largest factors driving the market will be Chinese demand, how OPEC+ handles its impending production cut taper, and the potential for added fiscal stimulus in the U.S. after the election.

Technicals: This was an ugly week for crude oil and there is now a formidable ceiling at 36.93-37.06 that price action must close out above in order to begin repair.

Gold (December)

Yesterday’s close: Settled at 1868, down 11.2

Fundamentals: Gold is firming off an overnight low of 1863.3 as the US dollar weakens on euro strength. GDP data from the Eurozone was better than expected and inflation, although weak, was firmer than anticipated. The news, when coupled with PCE data in the US coming in lower than expected, paints a supportive picture for gold to finish out the week from these levels and has sparked selling of the US dollar’s rally. Core PCE is the Fed’s preferred inflation indicator and the read came in at 1.5% when 1.7% was expected, well off their 2.0% target. Seemingly, this extends the Fed’s timeline of ZIRP and opens the door to added measures next year if inflation continues to underwhelm. Additionally, the resurgence of Covid-19 paints a deflationary picture and one that could harm gold in the near term upon a risk-off move ahead of the weekend.

Technicals: Gold is firmly out above our momentum indicator at 1872 this morning and aligns with settlement at 1868 to create first key support. The bigger achievement from yesterday’s low was the overall hold in front of a very crucial level of support and now the surge back above 1877.1-1880. The move helps to neutralize near-term waves of selling, but gold still has its work cut out for it.

Learn more about Bill Baruch at Blue Line Futures

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