REPORT
By Övünç Kutlu
U.S. letter, week beginning Oct. 24

What happened last week?

Last week, the most important developments in the U.S. stock market were the quarterly earnings of major American companies. Investors closely watched the third quarter net income and revenues of the companies and took positions in the market accordingly.

One of the American financial services and investment banking giants, Citigroup, announced that its net income and revenue fell in the third quarter. JP Morgan Chase and Wells Fargo reported a decline in their net income but an increase in revenue. The Bank of America, Goldman Sachs and Morgan Stanley, on the other hand, saw their net income and revenue rise in the third quarter, compared to the same period a year ago.

Among those banks, it was Morgan Stanley that had the highest percentile increase in net income by 57 percent while Goldman Sachs had the highest jump in revenue by 19 percent.

In the technology sector, IBM’s third quarter net income and revenue fell in the third quarter, compared to the same period last year. Netflix, Intel and Microsoft posted rises in earnings and revenues, but Yahoo saw its net income increase but its revenue fall year-on-year. 

Netflix was the company that recorded the highest increase in net income and revenue with a 75.2 percent and 31.6 percent rise, respectively, year-over-year. Meanwhile, with positive results, Microsoft’s stock price reached its highest level in the company’s history.

In the oil market, some American oil majors reported losses in the third quarter due to low crude prices.

The world’s biggest oil services company, Schlumberger, and the biggest energy infrastructure firm in North America, Kinder Morgan, posted declines in net income and revenue in the third quarter of this year.

Meanwhile, another oil services company Halliburton announced an increase in net income, although accompanying it with a slight fall in revenue. The company underlined the importance of cost management and efficiency in achieving a rise in income year-over-year.

After posting increases in net income and revenue of major American companies overall, the U.S. stock market ended the week with gains. Last week, the S&P 500 and the Nasdaq gained 0.4 percent and 0.8 percent, respectively and the Dow remained unchanged.

The oil market continued to help investors gain profits, thanks to OPEC’s plan to limit its production quota and with the decline in the U.S.’ weekly crude oil inventories. As a result, oil prices posted gains for the third consecutive week.

However, crude prices began the new week with a decline after Iraq’s Oil Minister Jabber Al-Luaibi said Monday that his country should be exempt from the OPEC deal.

 

What to expect this week?

Investors will continue this week to closely watch the quarterly earnings of major American companies, and are expected to take positions in the stock market accordingly.

In particular, Apple’s earnings, which will be announced on Tuesday, will give an insight into the tech giant’s latest sales. If the California-based firm’s net income and revenue in the third quarter beat estimates, investors could take a buying position in tech stocks which could result in gains for the Nasdaq.

Investors will also watch the announcement Thursday of third quarter net income and revenue of Alphabet, Google, Amazon and Twitter.

On the banking sector, all eyes will be on German giant Deutsche Bank. The earnings are expected to draw a clearer picture on the ongoing crisis the bank faces. Some experts warn investors that the turmoil Deutsche Bank is going through is a warning sign of another financial crisis that could emerge in Europe and eventually affect the U.S.

In the oil market, oil services company Baker Hughes and the U.S.’ biggest oil firm ExxonMobil will announce their third quarter net income and revenues.

This week, the market and investors will also closely watch statements from the Federal Open Market Committee (FOMC) members and their views on a possible rate hike by the Federal Reserve this year.

On Monday, Fed Kansas City President James Bullard said the Fed needs only a single rate hike, and added that he expects interest rates to be low in the next two to three years. Bullard has a voting right in the FOMC this year.

Fed Chicago President Charles Evans, however, said Monday that the Fed could raise its benchmark interest rate three times between now and the end of 2017, but Evans does not have a voting right in the FOMC this year.

On the macroeconomic front, new home sales for September will be announced Wednesday, while durable goods orders and pending home sales for September are due Thursday.

Investors, the market, and especially FOMC members will wait Friday when the U.S.’ third quarter GDP growth will be revealed. In the second quarter, the American economy grew by 1.4 percent. The market expectation for the third quarter is a 2.5 percent growth. If GDP growth comes in line with expectations, FOMC members could decide that the U.S. economy is strong enough for a rate hike this year.

In the oil market, statements from OPEC countries and Russia to curb output levels are still important as OPEC’s November meeting looms. Any positive messages from the cartel’s member states and Moscow could continue the positive sentiment in the crude market and push oil prices higher. In addition, the crude market and investors will also watch the weekly change in the U.S.’ crude oil and gasoline inventories that is due Wednesday.

 

25 Oct,2016

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