Written by: Edward Moya | OANDA
US stocks are rising after a wrath of earnings showed mostly better-than-expected results and guidance, except for Netflix. The lessons learned from the bond market should be that Wall Street needs to expect excessive volatility over the next few months as the Fed manages a taper announcement as pressure grows for them to normalize rates. The Dow Jones Industrial is leading the charge higher while the Nasdaq is barely positive.
If the theme from earnings season continues to be an upbeat outlook for the economy and strong consumer that is handling the current price increases, Treasuries could plunge even further, and the 10-year yield could be back above 1.40% by the time earnings season wraps. The reflation trade is back and this time it might stick around.
Earnings
Netflix, the first FAANG stock to report and did they disappoint. Netflix earnings came in at $2.97 a miss of the $3.14 estimate, while revenue rose to $7.34 billion in line with expectations. Traders did not like the guidance for subscriber growth, 3.5 million subscribers are expected in Q3, short of the 5.86 million that Wall Street was anticipating.
Netflix seems like they will be spending a lot more in the foreseeable future on both content and as they try to break into video games. The streaming giant stated they will create original games and that it will be included in members’ Netflix subscription at no additional cost.
Chipotle
Chipotle delivered a robust earnings report with strong beats across the board, a stock buyback announcement, and optimism that lunch is starting to return. Second quarter adjusted EPS impressed at $7.46, much higher than the analysts’ estimate of $6.53, while comp sales rose to 31.2%, better than the 29.8% estimate.
Chipotle CFO Hartung noted that they have not seen any resistance whatsoever to higher menu prices, a sign that the US consumer is still very strong given the recent inflation surge.
J&J
The New Brunswick, New Jersey-based drug maker delivered a solid earnings beat and raised both sales and EPS guidance. J&J had robust sales with both devices at $6.98 billion better than the $6.59 billion estimate and with most of their drugs.
Coca-Cola
The soft drink giant’s business is thriving as the reopening of the economy is unlocking a key portion of the business that was lost last year. Coca-Cola crushed this earnings report with strong EPS and organic revenue beats along with boosting full year organic revenue guidance.
Verizon
Verizon posted strong wireless-subscriber growth along with a raised outlook. Verizon CEO noted that they are not seeing any supply chain constraints. With 20% of their customers having 5G phones, Verizon still sees strong upside in gaining new customers.
This round of earnings covered many sectors and was fairly impressive. The remaining second quarter results look like they will also come in strong and show that peak earnings growth expectations did not disappoint.
Oil
Crude prices are soaring as risk appetite returns and energy traders believed a 15% pullback over the past two weeks was excessive given how tight market conditions remain.
Yesterday, prices initially plunged after the API reported a surprise build of 806,000 barrels last week, the first time stockpiles rose since May. Today's EIA crude oil inventory report showed stockpiles rose more 2.1 million bpd, more than the analysts' consensus of a 3.9 million draw. A big build in the Gulf Coast stemmed from an almost 40% drop in exports. Imports rose to the highest levels since last July.
WTI crude initially dipped on the crude build but resumed climbing higher as US production stayed steady at 11.4 million bpd. Private operators may take advantage of supportive oil prices above $60 and that should suggest US producers may start to increase output. OPEC+ isn't fearful of US production ramping up too much and that should allow this market to remain tight.
Gold
Gold prices slumped on both rebounding Treasury yields that sent the dollar higher and as robust earnings dented demand for safe-havens. Gold may consolidate around the $1,800 level, but the longer-term outlook is still bullish as the fight against COVID-19 will drag into next summer as every nation tries to get around 70% of their population vaccinated. Gold should see steady inflows since the global economic recovery is still vulnerable to further restrictions of movement, alongside some signs that inflationary pressures are peaking, which could delay tightening cycles for some central banks. A lower interest rate environment across the major central banks is inevitable and that should be a key argument for holding onto bullion.
Another reason why gold is underperforming the risk-on trade today is that Bitcoin is seeing strong demand. The institutional world has slowly been increasing crypto exposure as some traders moved funds that normally would go to gold into cryptocurrencies. If the Bitcoin boom reasserts itself, that could mitigate some of the upside potential for gold.
Bitcoin
It appears crypto traders will not see a plunge towards $20,000 as too many retail and institutional traders started to line up entry orders to buy what was believed to be the last major dip. Risky assets are rebounding across the board, especially Bitcoin as calm returns to Wall Street as the panic-selling frenzy appears to be over. Some traders are viewing today’s rebound as an all-clear signal for getting back into Bitcoin, but that probably won’t be confirmed until financial markets see if risk appetite is upheld after the FOMC policy next Wednesday.
Over the next couple of months, Bitcoin will predominantly trade as a risk-on asset and not so much as an inflationary hedge. Bitcoin’s best friend will be a dovish Fed and as long as that remains the case, prices could continue to stabilize going forward.
Related: Inflation Is Starting to Weigh on Consumer Confidence and Spending