Markets Cautious as Earnings Season Kicks Off

Market Moves 

Earnings season kicks into full gear this week with the big banks taking center stage. Citigroup Inc. (C) took the lead on Monday morning, and it easily beat expectations for both revenue and profit. But the company's numbers were boosted significantly by the recent initial public offering of bond-trading platform, TradeWeb. After its earnings announcement, Citigroup shares had some sharp swings before ending the trading day little changed from the previous close.

Below, a chart of Citigroup's stock shows the whipsaw price action on Monday, as well as the fact that price has reached up to major resistance right around the late April high. If Citigroup fails to break out significantly above this high, we could see a potential turn back to the downside.

Chart showing the performance of Citigroup Inc. (C)

Other banking heavyweights set to report earnings this week include The Goldman Sachs Group, Inc. (GS), Wells Fargo & Company (WFC), Bank of America Corporation (BAC), and JPMorgan Chase & Co. (JPM).

Overall, stocks were mixed and relatively flat on Monday as investors continued to show caution ahead of a highly uncertain earnings season. Generally, earnings are expected to have been affected by the major market themes of the past several months – slowing global economic growth and trade wars. These factors may have affected earnings for the second quarter, possibly dragging down revenue and profits.

China Growth Slows to Multi-Decade Lows

Speaking of slowing global economic growth, China reported that its year-over-year economic growth in the last quarter grew by 6.2%, which is the slowest rate of growth in nearly three decades. China equity markets, as represented by the Shanghai Composite Index (SSEC), fell on the news on Monday. But Chinese stocks ended up recovering and gaining on the day due to other data that was positive, including better-than-expected industrial production.

Still, the Shanghai Composite remains generally pressured after having hit some turbulence starting in April that has been caused in part by concerns over a still-unresolved trade war between the U.S. and China. As shown on the chart, the Shanghai Composite is currently at a critical juncture right around its 50-day moving average. With any downside break, the next major target is around the 2,800 level, in the vicinity of the key 200-day moving average.

Chart showing the performance of the Shanghai Composite Index (SSEC)

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Oil Falls Again on Demand Worries

After having made a partial recovery from June lows, crude oil prices fell again on Monday due in part to worries that slowing China economic growth would result in lower demand for crude oil. This is especially the case since China is the second largest consumer of crude oil globally after the U.S.

Also helping to weigh on crude prices is the supply situation. It was initially feared that Tropical Storm Barry, which has hit and devastated a few southern and Midwestern U.S. states, would cripple oil refineries in its path. This has not really been the case, so oil supplies could potentially escape this threat.

As shown on the chart, U.S. crude oil futures took a downturn on Monday. Despite the rebound and recovery since mid-June, the price of crude oil remains weighed down in a generally descending line since last October. If global economic growth data continues to disappoint and crude oil supplies remain robust, crude prices could fall back down toward key support around $55.00.

Chart showing the performance of U.S. crude oil futures

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Bitcoin and Major Cryptos Remain Pressured

Bitcoin's sharp rise and recovery in the past few months has been due in part to renewed interest in cryptocurrencies. Much of this resurgence of interest has been due to Facebook, Inc's (FB) recent announcement of its own crypto project, Libra. While Libra's formal launch is not expected until next year, the company has already attracted a great deal of hype for the project, and it has added a certain degree of legitimacy to the cryptocurrency market due to its own involvement along with such payment industry giants as Mastercard Incorporated (MA) and Visa Inc. (V) as partners.

Lately, however, Facebook's cryptocurrency plans have come under intense fire. Troubling comments have come from the likes of President Trump, Fed Chair Jerome Powell, and most recently, Treasury Secretary Steven Mnuchin. President Trump recently tweeted that he's "not a fan" of cryptocurrencies and that Facebook would need a bank charter to launch Libra. On Monday, Mnuchin said that Libra "could be misused by money launderers and terrorist financiers."

While bitcoin is no Libra, developments in cryptos tend to affect the whole group, and especially the original cryptocurrency. As shown on the chart, Monday was actually a substantial up-day for Bitcoin. But overall, it has been pressured back down to its 50-day moving average for the first time since March. The fact that it has bounced off that average, though, is a constructive sign. Couple that with the fact that the cryptocurrency has been in a strong uptrend since its December lows, and a strong case for a continuation of that bullish trend could be made.

Chart showing the performance of bitcoin vs. the U.S. dollar (BTC/USD)

The Bottom Line

This week is mostly about highly anticipated earnings releases from the big banks. Investors are somewhat skittish about how this earnings season may turn out, but markets remain cautiously bullish for the time being. As more companies report in the days ahead, market directions should become progressively clearer.

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