Could stocks recover with Netflix earnings next?

European stocks recovered from their lows in the afternoon after initially falling this morning as mixed Chinese data overnight encouraged some profit-taking, although Wall Street shares were still struggling at the time of writing despite better-than-expected numbers from Morgan Stanley.

The Nasdaq 100 was almost 2.0% worse off at the time of writing, hurt by ongoing profit-taking, with investors being cautious ahead of earnings from Netflix tonight. However, the trend for stock markets remain bullish and so far, there is no technical reason to expect a top has been reached.

The release of key economic numbers as well as the European Central Bank meeting provided no real fireworks (see below for more). While some weakness for the markets is possible for example because of earnings results or weak data, investors know full well that central bank support will be there for a while yet as the economic recovery from the coronavirus pandemic remains bumpy. What’s more, optimism due to the progress in developing a coronavirus vaccine should keep the downside limited. Furthermore, oil prices remain supported despite retreating from their best levels reached on Wednesday after the OPEC+ confirmed it would start tapering output cuts from next month. However, the downside looks set to be limited owing to hopes over a rebound in demand as I discussed yesterday HERE.

It is worth pointing out also that US bank earnings have not been as bad as some had feared, with lenders setting aside billions for bad loans in the event of a large-scale consumer defaults due to the economic fallout from the pandemic. But this was always going to be the case and therefore priced in. That said, Bank of America (BAC), seen as a bellwether for the US consumer, saw its profits and share prices slide as the profit at the lender’s consumer-banking unit plunged 98%, although better trading performance kept the overall drop in profit to 52%. Morgan Stanley (MS) shares rose after the bank reported a jump in revenue and earnings thanks to fixed-income trading revenue which nearly tripled. Meanwhile another bellwether Johnson & Johnson (JNJ) beat its earnings expectations with an EPS of $1.67 vs. expectations of $1.51. Net revenue was $18.3 billion for Q2, higher than the expected $17.6 billion. The company expects a more positive outlook for the fiscal year.

Investors are looking forward to earnings from Netflix (NFLX) after the market is closed. Expectations are running sky-high because of the booming subscriber growth during lockdown, with the stock up around 58% year-to-date, massively outperforming the S&P 500. The company is expected to report an earnings per share of $1.82 this evening. Its revenue is expected to come in at $6.09 billion. Meanwhile, shares in Twitter dropped after accounts of some leading politicians and business leaders were hacked.

Thus, it is worth keeping an eye on the tech-heavy Nasdaq 100 ahead of earnings from Netflix and as the focus turns to other technology names now that the banks are done. The index still looks overall bullish with the trend lines intact and moving averages pointing higher. On the chart I have laid out a potential bullish scenario to watch:


Source: TradingView.com and ThinkMarkets
 
Meanwhile in terms of macro data, today’s economic pointers from around the world were overall better, although US jobless claims again remained the sticking point.  
 

• US initial jobless claims were basically unchanged at 1.3 million from the prior week, disappointing expectations for a drop to 1.25m.
• US retail sales came in better-than-expected, with headline sales showing a 7.5% while core sales also topped with a 7.3% positive reading. Both measures were expected to print 5.0% respectively.
• NAHB Housing Market index printed 72 for July 2020 compared to 60 expected. This is a decent showing from the housing market and a good signal for the US economy, with people taking advantage of low rates.
• UK unemployment unexpectedly remained at 3.9% in May when a rise to 4.2% was expected, while jobless claims also surprised by falling 28,000 in June when a rise of 250,000 was expected.  
• ECB left its policy unchanged earlier, keeping the pandemic bond buying at $1.3 trillion, repeating that the stimulus programme is flexible and that it will run at least thru end-June 2021. The ECB also kept the main rate at 0.0%, deposit rate at -0.5% and marginal lending rate 0.25%. At the ECB’s press conference, Christine Lagarde said everything you would expect from the central bank president e.g. risks remain on downside, weaker demand to put downward pressure on inflation and recovery is in early stages etc.
• The latest economic data from China revealed that recovery from the coronavirus pandemic remains bumpy and with the rest of the world is still deep recession, it remains to be seen how the world’s second largest economy will cope going forward.
  • Retail sales fell for the fifth consecutive month, down 1.8% in June compared with estimates for a 0.5% rebound.
  • GDP expanded by a better-than-expected 3.2% in Q2 compared to the same period a year ago, as the economy returned to growth after slumping 6.8% in the first quarter. Growth was stronger than 2.2% expected.
  • Industrial Production rose 4.8% y/y in June as expected, up for the third straight month

• Australian employment rebounded by 210,800 in June, beating expectations of 106,000, following drops of 264,100 in the previous month and 594,300 in April. However, this couldn’t stop the unemployment rate from rising to its highest since 1987 of 7.4% from 7.1% previously and compared with forecasts for a modest rise to 7.2%. AUD/USD once again failed to hold above the key 0.70 handle, as the US dollar rebounded across the board after the Dollar Index had fallen for four consecutive weeks.