The tone set by the US banks on Friday has created pessimism among traders and this is influencing the price action in the US and Europe. Moving forward, we are likely to see waves of volatility in stock markets as more companies release their earnings for 2021 and, more importantly, inform investors about what 2022 is likely to look like in terms of performance and profits. Similarly, the Fed’s raising interest rates this year is likely to persuade investors to reassess their risk and prompt them to rebalance their asset portfolios, sparking uncertainty in various sectors, particularly those associated with high growth and technology.
In Friday’s session, the Dow Jones Industrial Average fell 0.56%, while the S&P 500 index jumped 0.08%. The Nasdaq, the tech-savvy index, climbed 0.59%, and the Russell 2000 rose 0.14%.
Earnings reports from major banks have prompted investors to sell their holdings in the banking sector. The banking sector is likely to remain under pressure as we see more earnings. JPMorgan Chase, the largest bank in the United States by assets, saw its stock price fall nearly 6% after the bank’s CFO stated that meeting its target return on capital of 17% over the next two years will be difficult due to higher expected expenses and moderating revenues. However, the bank managed to slightly outperform expectations, reporting earnings per share of $3.33 versus the expected $3.01. Its revenue was also higher than expected, coming in at $30.35 billion instead of $29.9 billion.
Similarly, Citigroup’s stock price fell nearly 1.30% after the company reported a 26% drop in profits despite exceeding revenue estimates. The bank achieved earnings per share of $1.46 versus the expected $1.38 and revenue of $17 billion versus the expected $16.75 billion.
On the other hand, the stock price of Wells Fargo jumped nearly 3.70% as its revenue came in at $20.85 billion, outperforming the forecasted $18.82 billion and net income climbed 86%, from $3.09 billion a year ago to $5.75 billion. The bank’s earnings per share also exceeded the $1.13 forecast, coming in at $1.25. Earnings reports for Goldman Sachs and Morgan Stanley are scheduled to be published this week.
Investors should note that stocks of consumer discretionary companies were also under pressure after retail sales and consumer sentiment data failed to woo investors. In December, retail sales were expected to decline 0.1%. However, actual retail sales for December fell 1.9%. The main factor influencing lower sales is likely the rise in coronavirus cases, which stopped consumers from visiting shops and likely shifted demand to online stores providing home delivery services. Similarly, consumer sentiment was dented by expectations of higher inflation in the long term.
Following Bitcoin’s recent selloff, which saw the digital coin drop nearly 40% from its historical high in November and test its critical support level of $40,000, it appears that the digital coin has stabilized and the negative trend is likely over. In addition to successfully maintaining its price above $40,000, options activity indicates that investors can expect cryptocurrency prices to rise from now on.
According to the most recent data, demand for call options is rising while demand for put options is declining, and the spread between bearish and bullish expectations has shrunk to near zero from double digits. All of these are encouraging indicators for the cryptocurrency market.
Having said that, investors should keep in mind that the price action of Bitcoin is still likely to remain volatile as a result of a hawkish Fed, which is likely to raise interest rates soon, which is a negative for risky assets in general. Furthermore, the correlation between crypto markets and equity markets is growing, implying that a drop in equity markets could trigger a selloff in crypto markets as well.
Brent, the global crude oil benchmark, has risen on expectations that demand will outstrip supply this year, despite signs that the world’s two largest economies, the United States and China, will likely release oil supply from strategic reserves. Crude oil prices have also benefited from geopolitical factors such as fears that Russia will attack Ukraine after stationing 100,000 troops on its border. As a result of these factors, various banks predict that oil prices will reach $100 per barrel this year.
Gold prices have taken a hit because of the rise in treasury yields but are still hovering above the crucial $1,800 price level. The yield on ten-year Treasury bonds has risen to nearly 1.793%, while the yield on 30-year Treasury notes has hopped to nearly 2.126%. Treasury yields move inversely to gold prices because when yields rise, the opportunity cost of holding the yellow metal also rises, making it less appealing to investors. For a brief period, gold got some support from weakness in retail sales data.
Moving onwards, investors should closely look at economic reports and the number of coronavirus cases to decipher how the precious metal will likely perform in coming months.
The US dollar index grew by almost 0.3% to 95.157. Despite the gains, the dollar finished the week nearly 0.6% lower, its worst weekly performance since September of last year. The US dollar has been under pressure since early 2022, when Fed officials hinted at aggressive tapering while receiving the highest inflation readings in nearly 40 years.
The pound, on the other hand, fell in value, falling nearly 0.22% against the dollar, as investors sought to understand the impact of future changes in political leadership.
According to latest economic reports, China was able to achieve an economic growth rate of 8.1% in 2021, lower than the projected 8.4%. In the last quarter of 2021, China’s GDP surged 4% compared to that in 2020, growing faster than the forecasted 3.6%. Moreover, industrial production jumped nearly 4.3% in December, while a 3.6% rise was forecasted. On the other hand, retail sales grew at a rate of 1.7% versus the 3.7% rise projected.