Volatility is back in full swing Friday as U.S. and TSX futures point to a sharp drop in stocks at the opening bell after tech giant earnings disappointed and following Thursday’s 400-point gain on the Dow and gains in other markets as well.
Strategists say the drop follows less robust than expected earnings from Amazon and Google parent Alphabet after the close of markets Thursday.
Amazon.com Inc. forecast holiday season sales and profit that missed Wall Street targets on Thursday, projecting revenue growth that would be the slowest in years. Google’s corporate parent Alphabet boosted its earnings by 37 per cent during the third quarter, but it still wasn’t enough to reassure investors worried about tougher regulations that could make it harder to collect the personal information that fuels the company’s advertising network. Alphabet’s shares fell 5.7 per cent in premarket trading while Amazon was off nearly 9 per cent. Facebook shares were down 3 per cent, Netflix fell 3.7 per cent and Apple dipped 1.6 per cent.
However, stock futures pared their decline after the U.S. Commerce Department reported that America’s economy expanded at a rate of 3.5 per cent in the third quarter, a pace that was faster than expected by economists.
Over all the third-quarter earnings season has been marred by rolling sell-offs across global markets and sharp downgrades to earnings estimates.
Disappointing Amazon and Alphabet results reignited investors’ anxieties about the overwhelming dominance of tech stocks – prized for seemingly unstoppable growth – in this market cycle.
“There’s a huge amount of hot money in the FANG stocks,” said Christopher Peel, chief investment officer at Tavistock Wealth, referring to big U.S. tech stocks Facebook, Amazon, Netflix and Google (Alphabet).
“But the fundamentals are not materially changed,” he added. “In the bounce back off the lows, volume is much higher on the way up which indicates in the down trade it’s thin trading on low volume while on the up it’s more longer-term investors.”
Overseas, global stocks slid lower on Friday and were set for their worst week in more than five years, as anxiety over corporate profits added to fears about global trade and economic growth.
European shares tracked U.S. stock futures lower after Alphabet and Amazon’s earnings missed expectations, further sapping risk appetite as European earnings also disappointed.
The leading index of euro zone stocks fell 1.5 per cent. Britain’s FTSE was off 1.5 per cent, Germany’s DAX was down 1.9 per cent and France’s CAC 40 down 2.4 per cent.
The MSCI All-Country World Index, which tracks shares in 47 countries, was down 0.3 percent after trading began in Europe. It was set for its fifth straight week of losses, its worst losing streak since May 2013.
“Expectations for U.S. company earnings are quite high, so whenever they are not being met, the reactions are quite severe,” said Miraji Othman, credit strategist at BayernLB.
“We have grown used to solid numbers, 18 per cent revenue growth, 25 per cent revenue growth and so on. The valuations have become quite ambitious.”
MSCI’s broadest index of Asia-Pacific shares outside Japan dropped 0.9 per cent, erasing gains made in the opening hour and hitting its lowest level since February 2017. The Chinese yuan slid past a key level, refocusing attention on slowing growth in the world’s second-biggest economy.
The MSCI Asia index has been bruised by a sell-off in the past several days, and is on course for its fifth weekly loss – its longest losing streak since 2015. It has fallen more than 4 per cent this week.
Chinese shares were pulled lower and the yuan fell past 6.96 to the dollar, touching its weakest level against the dollar since December 2016.
The blue-chip index was down 0.6 per cent and the Shanghai Composite was 0.2 per cent lower. In Hong Kong, the Hang Seng index was 1.1 per cent lower, with tech shares dropping 3.13 per cent. Japan’s Nikkei stock index closed 0.4 per cent lower, ending the week down 5.98 per cent.
Financial markets have been whipsawed in recent sessions amid concern over global growth created by Sino-U.S. trade frictions, a mixed bag of U.S. corporate earnings, Federal Reserve rate increases and an Italian budget dispute.
Bear markets – a price drop of 20 per cent or more from recent peaks – have increased across indexes and individual stocks since the start of this year.
“The first, and most important (worry) is that Fed tightening and fading fiscal stimulus will cause the U.S. economy to take a turn for the worse ... The second is that China’s economy will continue to struggle,” analysts at Capital Economics said in a note to clients.
“As we have been arguing for a while now, these worries are likely to get worse over the next 12 months or so.”
Commodities
Oil prices dropped more than 1 per cent on Friday, heading for a third weekly loss after Saudi Arabia warned of oversupply, while a slump in stock markets and concerns about trade clouded the outlook for fuel demand.
Brent crude oil fell US$1.12 to a low of US$75.77 per barrel and was trading around US$78.84, down US$1.05. The contract is on course for a weekly loss of almost 5 per cent. It has fallen by more than US$10 in the last three weeks. U.S. crude was US$1.05 lower at US$66.28, set for a 4.1-per-cent loss this week.
“The energy complex is resuming its downward trajectory,” said Stephen Brennock, analyst at London broker PVM Oil. “More of the same is expected in the near-term with sellers still very much on the prowl and intent on pushing prices lower.”
Spot gold ticked up 0.4 per cent to US$1,236.17 per ounce.
Currencies and bonds
The Canadian dollar sank Friday to the 76-cent-US level as the U.S. dollar gained in strength and oil prices declined.
“Support stands at $1.3020 (76.8 cents US), followed by $1.2914 (77.43 cents US) (the 200 day moving average (dma)) and $1.2842 (77.86 cents US). Initial resistance stands at $1.3113 (76.26 cents US) – an important trendline that serves as the pivot for our bearish technical view. A break through this level would target a move to $1.3226 (75.60 cents US) and $1.3290 (75.24 cents US),” RBC wrote in a report.
The dollar rose to a 10-week high on Friday as investors waited to see if U.S. economic growth figures do anything to interrupt its months of strength.
The dollar index rose 0.1 per cent against a basket of major currencies to 96.749, its highest since Sept. 16.
A recent downturn in stocks and worries about corporate earnings growth has prompted forex investors to buy the yen and Swiss franc, two currencies typically seen as safe havens during downturns.
Analysts see persistent risks for markets including trade tensions and Italy’s budget woes.
“Is there a slowdown coming at the moment? That’s the question and a combination of geopolitical risks is dragging down sentiment,” said Miraji Othman, credit strategist at BayernLB.
A potentially strong reading of U.S. gross domestic product data on Friday could see the dollar climb further, defying U.S. President Donald Trump who has expressed displeasure over the currency’s strength.
“Today’s robust U.S. GDP will illustrate to the market the deep division between the U.S. and the euro zone when it comes to growth performance,” said Commerzbank analyst Thu Lan Nguyen.
Speculation that U.S. interest rates will be hiked more aggressively than anticipated next year would see the dollar strengthen against the euro, she added.
If the reading is lower than expectated, however, investors could worry about economic growth momentum hastening a change in the Federal Reserve’s monetary tightening path.
“Today’s number could give signs if we are close to peak earnings for U.S. corporates. Housing data and consumer goods durables data has been soft lately,” said Sim Moh Siong, currency strategist at Bank of Singapore.
The 10-year Treasury yield was down slight at 3.087 per cent and the Canada 10-year bond yield slipped to 2.413 per cent.
Stocks to watch
Rogers Communications Inc. is closing in on a deal to sell almost all of its magazine business, according to multiple sources. The Toronto-based telecommunications and media company is negotiating to sell seven of its digital and print magazine titles − Maclean’s, Canadian Business, Today’s Parent, Hello! Canada, Flare and Chatelaine’s French and English editions − to a company owned by Graeme Roustan, the publisher of sports magazine The Hockey News, according to sources with knowledge of the discussions. The deal would also include Rogers’s custom-content group, which provides services to marketers, such as creating branded in-house magazines.
Independent oil refiner Phillips 66 beat analysts’ estimates for third-quarter profit on Friday, as cheaper domestic crude prices boosted its refining margins. The company’s adjusted earnings rose to $1.46 billion, or $3.10 per share, in the third quarter, from $858 million, or $1.66 per share, a year earlier. Analysts on average had expected the company to earn $2.48 per share on an adjusted basis, according to Refinitiv data. Its shares rose 3.5 per cent in premarket trading.
Earnings include: American Airlines Group Inc.; Charter Communications Inc.; Colgate-Palmolive Co.; First Quantum Minerals Ltd.; Glencore PLC; Moodys Corp.; Phillips 66; Rockwell Collins Inc.; Roper Technologies Inc.; Weyerhaeuser Co.
Other reading: Friday’s small-cap stocks to watch
Economic news
(8:30 a.m. ET) U.S. GDP for Q3. Consensus is an annualized rate rise of 3.4 per cent.
(10 a.m. ET) U.S. consumer sentiment for October.
with files from Reuters