Market Perspective for January 12, 2015

Earnings season begins this week with Alcoa (AA) reporting today. The company’s performance isn’t as closely followed since it removed from the Dow Jones Industrial Average, but the commodities giant is still a bellwether for the cyclical sector. Earnings estimates have been climbing for the firm, which is very good news.

The more closely watched reports come later in the week with releases from J.P. Morgan (JPM), Wells Fargo (WFC), Citigroup (C), Bank of America (BAC) and Goldman Sachs (GS). Only Citi is projected to report a drop in earnings. Well over one-quarter of SPDR Financials (XLF) is invested in these stocks, and several financial ETFs and mutual funds will have similar exposure. In terms of economic impact, these are the giants of the banking industry.

Technology and the semiconductor industry will get a big earnings report from Intel (INTC). Analysts estimate the chipmaker grew earnings 22 percent in the fourth quarter versus the same period in 2013.

The oil patch will also see a closely watched report from oil service provider Schlumberger (SLB). Shares of the company are trading near a 52-week low and have lost nearly 30 percent from peak prices set last summer. SLB makes up more than 20 percent of iShares US Oil Services (IEZ).

Oil prices opened the weak to the downside, with West Texas Intermediate Crude slipping to $46 in early Monday trading. Brent crude, which is sold mostly in Europe, fell to $48. The decline came in the wake of comments from a Saudi Alwaleed bin Talal who said $100 oil is gone and production cuts aren’t coming. He said that $100 oil was an artificial price, and unless demand picks up or supply is reduced, there will be no increase in oil prices.

The battle in the oil market is to see who will quit first, but until producers start throwing in the towel, prices will continue to fall and the Saudis are among the cheapest producers in the world. They are suffering along with everyone else, but since their economy is almost totally reliant on oil exports, they cannot risk being forced out of the market and will therefore fight for market share.

Even though the outlook for oil prices is still bearish over the short-term, investors are more optimistic. Energy stocks haven’t fallen to new lows even though oil has yet to bottom. That optimism could be tested this week if today’s drop is not a one-off decline.

On the economic calendar, December retail sales are out on Wednesday. On Thursday and Friday, we will get the producer price index (PPI) and the consumer price index (CPI). Falling oil prices is likely to have pulled the CPI below zero for the month. The eurozone reports industrial production on Wednesday and CPI on Friday. China reports money supply and loan growth for December on Wednesday.

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