Market Perspective for February 8, 2016

Investors anticipate yet another volatile week of trading following Monday’s disappointing losses that were preceded by a selloff in the European banking sector. A renewed drop in oil and regulatory concerns over energy loans are presenting European banks with a liquidity problem that hit some major U.S. banks with exposure to the sector. Deutsche Bank (DB) slid 8 percent on the day and Germany has begun strategizing with France to prevent further financial turmoil in the Eurozone. U.S. treasury bonds and high quality corporate bonds are rallying as investors opt for safety.

All eyes will be on Federal Reserve Chair Janet Yellen on Wednesday and Thursday, as investors look for direction on rate policy during the Fed’s semiannual testimony to Congress. The futures market puts the odds of a March hike at 0 percent and many speculators don’t expect rates to increase at all in 2016.  Yellen is unlikely to diverge from the Fed mantra of data dependent policy, but she may clarify the Fed’s view on the economy. Any indication of delayed rate hike expectations could potentially send long-term bond yields higher as investors become less concerned about hawkish Fed policy.

Earnings are still in full swing. Possible market movers reporting earnings this week include Dow components Coca-Cola (KO), Walt Disney (DIS) and Cisco Systems (CSCO). Time Warner (TWX), CVS Health (CVS), PepsiCo (PEP) and Twitter (TWTR) are also due to report earnings. Coca-Cola (KO) is expected to report earnings per share of $0.37 on revenues of $9.9 billion. KO shares have been resilient this year, in tandem with the consumer staples sector’s relative outperformance. Disney EPS estimates are looking for $1.45 on revenue of $14.79 billion. Shares of the firm are down about 25 percent since peaking before the Star Wars release in mid-November.  Cisco is expected to show EPS of $0.54 on revenues of $11.77 billion. Consensus estimates have Time Warner reporting EPS of $1.00 and revenues of $7.54 billion. CVS Health is expected to report EPS of $1.53 and revenues of $41.13 billion. PepsiCo is forecast to report EPS of $1.06 and revenues of $18.59 billion. After the severe drop in shares of LinkedIn (LNKD) last week, Twitter’s reaction will be of particular interest to investors. Analysts are looking for EPS of $0.12 and revenues of $710 million.

In addition to the two-day congressional testimony of Fed Chair Yellen, other economic news this week includes the Tuesday release of the Job Openings and Labor Turnover Survey (JOLTS) and wholesale inventories for December, which will impact the next estimate of fourth quarter GDP. The JOLTS report will be an important follow-up to last Friday’s mixed labor report. The initial weekly unemployment report will be available on Thursday, while Friday will see the release of retail sales for January and the latest University of Michigan Consumer Sentiment Index. Initial jobless claims are expected to be 281,000 and down slightly from last week. Retail sales are expected to increase 0.1 percent based on the average forecast, although half of the analysts predict no change or a decline.  The consensus on preliminary consumer sentiment is a reading of 92.5, an increase from the final January reading of 92.0. The consumer discretionary sector has taken a beating in February, sliding about 8 percent through midday Monday trading, so any positive news on the consumer will be warmly welcomed by investors.

Finally, commodity markets can breathe a sigh of relief: Chinese markets are closed all week in observance of the Lunar New Year. January and February data will be released together in March due to light activity during the 15-day holiday period.

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