Wall Street Breakfast: What Moved Markets

Jul. 30, 2022 5:23 AM ETCOMP.IND, DJI, MSFT, GOOGL, META, AAPL, AMZN, RIVN, SAVE, ULCC, JBLU, AAL, DAL, UAL, LUV, ALK, ENPH, SEDG, CEG, URI, CMG, SWK, CINF, CMCSA, NEM, BAX24 Comments
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Capping off a strong July after the dismal first half of the year, the stock market finished sharply higher on Friday with strong tech earnings helping to lift sentiment and take the focus off high inflation data. The Nasdaq (COMP.IND) ended +1.9%, the S&P (SP500) climbed +1.4% and the Dow (DJI) finished +1.0%. For the week, the Dow ended higher by nearly 3%, while the S&P 500 added 4.3% and the Nasdaq Composite rose 4.7%. "The market is taking a lot of comfort in the mixed earnings season because the concern was that it was not going to be mixed, that it would be more uniformly negative," noted BMO Wealth Management Chief Investment Strategist Yung-Yu Ma. The 10-year Treasury yield (US10Y) finished the week at 2.66% and the 2-year yield (US2Y) drifted up to 2.92%.

Big Tech

Windows in order: Microsoft (MSFT) rebounded 5% in extended trading on Tuesday following surprisingly upbeat guidance after a Q4 miss. On its earnings call, the company said it expected double-digit growth in sales and operating income in fiscal 2023, with margins roughly flat. That sticks to its previous guidance, an encouraging sign given the concerns of a looming recession. (41 comments)

A-B-C: Alphabet (GOOGL) popped 4% following its near Q2 miss, even as the company warned of more currency challenges from the strong dollar and some brand spending slowdowns. CFO Ruth Porat specifically pointed to challenging quarterly comparisons and said "going forward the very strong revenue performance last year continues to create tough comps that will weigh on year-on-year growth rates of advertising revenues for the remainder of the year." (26 comments)

Meta decline: Shares of Meta Platforms (META) fell about 5% AH during a Q2 earnings call on Wednesday as CEO Mark Zuckerberg took the mic. It came after the Facebook-parent posted its first decline in revenue as a public company, on the heels of its first-ever decline in users just three months ago. A full-year forecast also showed that current-quarter revenues would fall somewhere from 6%-14% short of expectations as marketing departments shrink their budgets and Apple's privacy rules make ads less effective. (49 comments)

iEarnings: Shares of Apple (AAPL) climbed 3% to $162 in extended trading on Thursday after posting FQ3 results that were better-than-expected and saying sales should "accelerate" in the current quarter despite U.S. economic uncertainty. Revenue attributed to the iPhone, which accounted for nearly half of all sales, came in at a whopping $40.7B (+3% Y/Y), while the company saw a "record" number of people switch over from Android during the quarter. That helped boost revenue at Apple's Services division, which rose to $19.6B (+12% Y/Y) and resulted in the number of people paying recurring subscription fees to climb 23% over the past 12 months to 860M. (141 comments)

Prime delivery: Investors also bid up shares of Amazon (AMZN), betting that strong AWS cloud computing growth will outweigh weakness at its core retail operations. The stock even soared 13.5% to $138 AH despite a $2B net loss, which was skewed heavily due to a massive writedown on its investment in EV maker Rivian (RIVN). A positive revenue forecast helped counter that sentiment, while advertising revenue reached $8.76B (+18% Y/Y), suggesting that Amazon could be taking market share from its mega-cap tech rivals. (76 comments)

Gas reduction plan

Raising overall economic risks for the continent, Russia continued to cut back on its gas supplies to Europe. The key Nord Stream 1 pipeline shifted to 20% of capacity this week, according to Gazprom (OTCPK:OGZPY), which cited maintenance problems and turbine issues that haven't been resolved. The announcement will make it harder and costlier for the bloc to fill up storage ahead of the winter, and saw Dutch TTF natural gas futures, a European benchmark, jump as much as 12% to €179/MWhr on Wednesday.

Bigger picture: While Moscow has blamed the supply cuts on servicing delays and sanctions, the EU has accused the Kremlin of energy blackmail and is hastily making backup plans. Each European government is trying to source as much alternative fuel supplies as they can, while working together on a strategy to reduce gas consumption by 15%. The joint proposal opens the door for rationing across the bloc, forcing heavy industry and factories to shut down for certain periods of time. Households and essential services, like hospitals and schools, will remain protected unless the crisis takes a turn for the worse, but targets could become mandatory in case of an emergency.

"Russia is playing a strategic game here," declared Simone Tagliapietra, senior fellow at economic think tank Bruegel. "Fluctuating already low flows is better than a full cutoff as it manipulates the market and optimizes geopolitical impact."

Go deeper: The EU's conservation measures may not be enough if Russia completely cuts off the flows. Europe has made itself super dependent on Russian energy in recent years, building out its natural gas pipeline network to Moscow instead of diversifying via LNG import terminals or beefing up sources like nuclear and coal. The eurozone also released its latest CPI print on Friday, which showed inflation rising at an 8.9% pace in July, while casting a shadow on the second half of the 2022. (2 comments)

Recession?

U.S. gross domestic product dropped at a 0.9% annualized rate in the second quarter, driven by a decline in consumer spending and private inventories, as well as weaker housing and business investment. The contraction followed the economy shrinking at a 1.6% pace in Q1, translating into two consecutive quarters of negative growth that are "typically" defined as a recession (see more details on that below). The 'r' word is now as charged as the midterm elections in November, and the White House was the latest to weigh in on the matter as it battles other economic headwinds like four-decade high inflation.

President Biden: "Now, there's no doubt we expect growth to be slower than last year, and for the rapid clip we had. But that's consistent with a transition to stable, steady growth and lower inflation. Fed Chairman Powell made it clear that he doesn't think the U.S. is currently in a recession. He said, quote, 'There are too many areas where the economy [is] performing too well.' It's no surprise that the economy is slowing down as the Federal Reserve acts to bring down inflation, but even as we face historic global challenges, we are on the right path and we will come through this transition stronger and more secure."

The official "recession" pronouncement boils down to a team of eight economists chosen by the National Bureau of Economic Research. Called the "Business Cycle Dating Committee," the group has been responsible for identifying recessions, and has set the dates of peaks and troughs of the U.S. economy since 1978. The funny thing is, that the committee generally waits a while after a recession has begun to officially pronounce it, and on occasion, even after it is already over.

Bad news is good news? While it's not entirely clear whether a recession has begun, investors are now betting on a slightly more dovish Fed, with a more moderate pace of rate hikes. Slower growth expectations were displayed in the bond market on Thursday, with the 10-year Treasury yield falling below 2.7% for the first time since early April. Since the end of WWII, a recession has never been declared without a loss of employment - triggering some economists to warn of a milder "growth recession" - though the market may be fearful of something bigger. (41 comments)

Kapowell!

In a similar vein to the GDP drama, economists are still haggling over whether the Fed appeared "dovish" or "hawkish" during Wednesday's meeting. The central bank raised the federal funds rate by three quarters of a percentage point for the second month in a row - to a range of 2.25% to 2.5% - but Jay Powell's vision of an end to the current rate-hiking cycle excited investors and triggered an equity rally during the session. According to the Fed, rates are now "right in the range" of "neutral" (i.e. an interest rate that neither hinders nor fuels economic growth), while Power expressed further doubt that the U.S. was in a recession - given the low unemployment rate and solid job gains.

Mixed messaging: "These rate hikes have been large and they have come quickly, and it's likely that their full effect has not been felt by the economy. So there's probably some additional significant tightening in the pipeline... As the stance of monetary policy tightens further, it likely will become appropriate to slow the pace of increases while we assess how are our accumulative policy adjustments are affecting the economy and inflation."

"We do see there are two-sided risks: There would be the risk of doing too much - imposing more of a downturn on the economy than was necessary, but the risk of doing too little and leaving the economy with this entrenched inflation - it only raises the costs of dealing with it later to the extent that people start to see it as part of their economic lives on a sustained basis. I don't think that's happened yet, but when that starts to happen, it just gets that much harder and the pain will be that much greater... Restoring price stability is just something we have got to do. There isn't an option to fail."

More on the matter: Over the past few press conferences, Powell was clearer than usual about telegraphing what lay ahead at coming gatherings, though this time around, things were less specific. "While another unusually large increase could be appropriate at our next meeting, that is a decision that will depend on the data we get between now and then," he declared. "It's time to just go to a meeting-by-meeting basis and to not provide the kind of clear guidance that we had provided." That could make things more opaque going into the second half of 2022, though it's not as extreme as the ECB, which last week scrapped forward guidance "of any kind." (47 comments)

Fifth largest U.S. airline

Shortly after Spirit Airlines (SAVE) vetoed a tie-up with Frontier Group (ULCC), JetBlue (JBLU) came to the runway with its own $3.8B merger. It follows a months-long bidding war that would create the fifth-largest U.S. carrier after American Air (AAL), Delta (DAL), United (UAL) and Southwest (LUV). JetBlue also attempted to buy Virgin America in 2016, but lost a contest to Alaska Air Group (ALK).

Backdrop: Both airlines previously accused each other of acting in bad faith, which had held up the discussions. "I have wondered whether blocking our deal with Frontier is, in fact, their goal," Spirit CEO Ted Christie announced on an earnings call back in April, saying he can't imagine getting regulatory approval for the deal when JetBlue faces antitrust scrutiny over an agreement with American Airlines, as well as overlaps in cities like Orlando and Fort Lauderdale. In response, JetBlue called the concerns a "smokescreen" and pointed to historical relationships between top brass at Spirit and Frontier Airlines.

While the regulatory hurdle is still high, Spirit now appears to be viewing it as a necessity after failing to garner enough support for the Frontier deal. "Many things were said, but business is business," Christie added in a statement. Jetblue hasn't even raised its prior offer of $33.50 per share, though it does include a prepayment of $2.50/share once the agreement has been approved by Spirit shareholders. A so-called ticking fee of $0.10 per month will also be applied from January until the deal officially closes.

Outlook: Some consumer advocates fear that ticket costs will rise if Spirit disappears, but JetBlue argues that creating a fifth major competitor would provide the best value for travelers by lowering fares and improving customer service. "The best thing that we can do to create a more vibrant, a more competitive industry is to really empower this new larger JetBlue," said CEO Robin Hayes. The combined fleet of the two airlines would include 458 planes, with annual revenue anticipated to total about $11.9B. (29 comments)

U.S. Indices
Dow +3.% to 32,845. S&P 500 +4.3% to 4,130. Nasdaq +4.7% to 12,391. Russell 2000 +4.9% to 1,887. CBOE Volatility Index -7.4% to 21.33.

S&P 500 Sectors
Consumer Staples +2.%. Utilities +7.1%. Financials +2.3%. Telecom -2.%. Healthcare +1.6%. Industrials +5.%. Information Technology +3.6%. Materials +2.6%. Energy +9.3%. Consumer Discretionary +4.3%.

World Indices
London +2.% to 7,423. France +3.7% to 6,449. Germany +1.7% to 13,484. Japan -0.4% to 27,802. China -0.5% to 3,253. Hong Kong -2.2% to 20,157. India +2.7% to 57,570.

Commodities and Bonds
Crude Oil WTI +3.8% to $98.3/bbl. Gold +2.1% to $1,764./oz. Natural Gas +1.1% to 8.286. Ten-Year Bond Yield -0.2 bps to 2.658.

Forex and Cryptos
EUR/USD +0.14%. USD/JPY -2.1%. GBP/USD +1.45%. Bitcoin +5.9%. Litecoin +8.4%. Ethereum +10.%. XRP +1.9%.

Top S&P 500 Gainers
Enphase Energy (ENPH) +34%. SolarEdge Technologies (SEDG) +25%. Constellation Energy (CEG) +22%. United Rentals (URI) +18%. Chipotle Mexican Grill (CMG) +16%.

Top S&P 500 Losers
Stanley Black & Decker (SWK) -16%. Cincinnati Financial (CINF) -12%. Comcast (CMCSA) -12%. Newmont (NEM) -12%. Baxter International (BAX) -11%.

Where will the markets be headed next week? Current trends and ideas? Add your thoughts to the comments section.

This article was written by

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