Key Takeaways This Week:
- Higher volatility seen as global traders turn to dollar, gold
- Oil Prices Could Soar on Middle East conflict
- All eyes on earnings as many stocks look to pop
It will be a busy week for investors in the third week of April as geopolitics rule the day with much riding on whether Iran’s unprecedented weekend strike on Israel triggers rounds of retaliation.
With investors already rattled by sticky inflation and the prospect of higher-for-longer interest rates, the escalation of the Middle East crisis is set to inject fresh volatility throughout the week.
Escalating geopolitical tensions in the Middle East, alongside supply concerns, have propelled crude oil prices upward, impacting the overall market sentiment.
Gold prices also experienced an uptick due to geopolitical uncertainties, increased central bank purchases, and heightened safe-haven demand. Consequently, emerging markets witnessed a late-week consolidation.
Even if the geopolitical landscape calms down early this week, there will be huge moves in individual equities as many of Wall Street’s darlings are reporting earnings over the next few days.
Let’s dig in…
Unpacking the Israel-Iran conflict
By now you’ve surely seen the news about the failed Iranian retaliation against Israel this weekend. And while early indicators seem to suggest calm in the markets, there’s one piece of news that might be more important for markets coming out of the Strait of Hormuz.
Iran seized a cargo ship—identified as the Portuguese-flagged MSC Aries — linked to Israeli businessman Eyal Ofer on Saturday amid growing concerns about a wider Middle East war. Indian authorities are now in touch with their Iranian counterparts as 17 citizens on board MSC Aries. Iranian state media said the ship had now been “directed towards the territorial waters” of Tehran.
Analysts noted that the week promises to be crucial for the market as fresh worries about a potential conflict between Iran and Israel emerge. Any significant escalation in tensions could trigger panic selling and volatility in global equity markets. Movements in US bond yields and the dollar index will be important factors influencing market sentiment.
The market will also be closely monitoring the movement of crude oil prices, which are impacted by geopolitical events. Global economic data including China economic growth rate, US retail sales, US Manufacturing Production Index, US Initial Jobless Claims and quarterly results will also be eyed by investors.
‘’Among the key factors, participants will be closely eyeing the performance of the global indices, especially after the recent slide in the US markets. The Dow Jones Industrial Average (DJIA) has support around the 37,800- 38,000 zone and its breakdown would add more pressure, which may reflect in our markets too,” said Ajit Mishra, SVP – Technical Research, Religare Broking Ltd.
Oil Prices
Global crude oil prices were up around one per cent but posted a weekly loss due to bearish world oil demand outlook from energy watchdog International Energy Agency (IEA) and concerns of a delayed interest rate cut by the US Federal Reserve after inflation rose more-than-expected in March.
This week, we expect oil to move in one direction… Up!
While markets may not react to a failed missile attack by Iran, they are sure to understand the implication of confiscating ships in the Strait of Hormuz.
More: Cash in on Oil’s Rise With MLP Checks
Earnings Season
Earnings Season will Ramp up this week with all eyes on bank stocks and the continued adoption of AI technology in big tech.
Here are three key earnings I'm watching this week:
Bank of America (BAC) – Reports before the open, Tuesday, Apr. 16
Wall Street expects BAC to earn 71 cents per share on revenue of $23.45 billion. This compares to the year-ago quarter when earning were 94 cents per share on revenue of $26.39 billion.
What to watch: Bank stocks might have outperformed the broader S&P 500 Index over the past six months, but the first three months of the year has yielded a different result. Although the U.S. economy has remained resilient, the financial sector has underperformed the broader S&P 500 index is part due to the expected decline of interest rates.
Bank of America stock has risen 7% year to date, trailing the 8% rise in the S&P 500 index. Ahead of its Q1 results, the bank's ability to sustain strong net interest income revenue with interest rates at or near their peak will be closely-watched. BofA's net interest income (fully tax equivalent) is estimated to be $14 billion, down from $14.1 billion in Q4 and $14.6 billion in Q1 2023.
Elsewhere, analysts will focus on provisions for credit losses, which will provide a window into how well banks in general expect the economy to hold up. Guidance for the next quarter and full year will also be a critical factor, perhaps more than the Q1 result itself. Having beaten earnings three times in the past four quarters, the bank’s focus on consumers and lending has been key to its success.
On Tuesday, investors will want to see these positive trends continue, specifically within loan and deposit growth. Toward the end of quarter, loan growth for large banks seemingly evaporated. Investors will look to see if Bank of America can meet its low-to-mid-single digit loan growth target for the year. Analysts will also look to gauge how other parts of the business such as investment banking can support top-line growth and profits.
Alcoa (AA) – Reports after the close, Wednesday, Apr. 17
Wall Street expects Alcoa to lose 52 cents per share on revenue of $2.58 billion. This compares to the year-ago quarter when the loss came to 23 cents per share on revenue of $2.73 billion.
What to watch: Shares of the aluminum giant have been one of the bright spots in the materials sector so far this year, rising more than 30% over the past six months, including 22% over the past thirty days. Already up 9% year to date, besting the 8% rise in the S&P 500 index, Alcoa has a lot to prove.
The rise in metal stocks have been driven by, among other things, a spike in prices for aluminum and other base metals on the heels of Federal Reserve's dovish policy meeting. Improving demand prospects from China, a top consumer, has also driven aluminum prices higher. In the first two months of the year, an estimated 720,000 tons of unwrought aluminum and products were imported by China, rising more than 90% year over year.
In a Reuters interview, Marex metals strategist Alastair Munro said, “Money is coming in and we have seen evidence of that first in copper but more recently in aluminum.”
How much of that money will come to Alcoa? Aluminum is used in a broad range of industrial and consumer end markets. And the commodity is enjoying a strong run as the global economy swings back into motion. As a result, Alcoa last quarter posted its second double-beat in three reporting periods, thanks to improving aluminum business. While there appears to be support for higher aluminum prices, the company on Wednesday must speak positively about the demand/supply outlook for the next several quarters to keep Alcoa stock in high demand as it has been.
Netflix (NFLX) – Reports after the close, Thursday, Apr. 18
Wall Street expects Netflix to earn $4.16 per share on revenue of $8.54 billion. This compares to the year-ago quarter when earnings were $2.88 per share on $8.16 billion in revenue.
What to watch: Since the start of the year, Netflix stock has been one of the better performing names in large-cap tech, rising 30% year to date, besting the 9% rise in the S&P 500 index. Expand that horizon by six months, and the stock is up some 72%, compared to the 18% rise in the S&P 500 index.
And there is more upside in the stock, according to analyst Jeffrey Wlodarczak at Pivotal Research who, while citing “continued solid momentum in the core business,” raised its price target to a new Wall Street high.
“We expect another solid result in 1Q as NFLX highlights their ability to grow even while taking material price increases,” Wlodarczak wrote in an investor note while reiterating his Buy rating and boosted his price target to $765 from $700. From current levels of $628, this assumes additional gains of close to 22%.
The company’s growth initiatives have begun to pay dividends. Not only is the company’s efforts to grow its ad-supported tier working, its management has also implemented ways to crackdown on password sharing. Netflix management expressed confidence in their growth strategy, saying, “We believe we have a clear path to reaccelerate our revenue growth: continuing to improve all aspects of Netflix, launching paid sharing and building our ads offering.”
Combined with the company’s upcoming content launches, there is a compelling case to remain invested in the stock. These assumptions will be answered when Netflix issues its guidance forecast for the next quarter and full year.
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