Market Recovers and Earnings still Flow

Daily Analysis - 07/02/2018

Snap Shot of Current Situation

The volatility in the Markets has picked up and the sell-off has come to a halt. The Fundamentals are the major market movers and the Buy the Dip scenario is still valid.

Volatility Index Sending Signals

The CBOE Volatility Index, or VIX, is a key measure of market expectations of near-term volatility taken by S&P 500 stock index option prices. It is sometimes considered the "fear gauge."

The term volatility refers to the amount of uncertainty in the size, and direction, of changes in a security's value and is typically measured by the deviation of returns.

The VIX surged by 115.6% on Monday to 37.32. Early Tuesday it rose above 50, the highest level since August 2015. Then the VIX dropped to 22.42, rose to over 45, before fading to roughly 35.

One Wall Street veteran predicts the index's wild moves will cause the VIX to go higher. VIX is giving us signals that this year the markets could create a lot of investment opportunities as speculators can take advantage of the markets movement in either direction.

While there is no direct trading in the VIX, it is used by a number of derivative securities including futures and exchange-traded notes as a reference for volatility.

Barclays told its clients Tuesday it estimated Volatility Target funds will sell about $225 billion worth of stocks in the next few days to maintain their portfolio volatility targets.

Tuesday's moves in the VIX comes after a stunning decline of more than 80 in after hours trading Monday for the ETN VelocityShares Daily Inverse VIX Short-Term.

XIV is issued by Credit Suisse and is supposed to give the opposite return of the VIX.

Credit Suisse announced on Tuesday the last day of trading for XIV will be Feb. 20. The bank is triggering the liquidation of the product after its price collapse.

Wednesday’s Crude Oil Inventories

As almost every Wednesday, crude oil inventories data will be reported at 15:30 GMT. Traders look for any signs as the effect is not only seen on the oil prices but on the commodity currencies as well, such as the Canadian Dollar.

Oil prices rose on Wednesday amid a share market recovery and supported by a report that U.S. crude inventories fell last week, although analysts warned that soaring U.S. output and a seasonal demand drop could soon weigh on crude.

After the stock markets have recovered, oil futures came higher covering some of their steep losses from previous days.

The report by the American Petroleum Institute (API) supported the oil markets saying that U.S. crude inventories fell by 1.1 million barrels last week to 418.4 million barrels.

Cuts from oil producers including members of OPEC and Russia have been withholding supplies since last year in order to tighten supplies and prop up prices. The cuts are set to last through 2018.

Other analysts, however, warned of the risk of lower oil prices, both from financial markets and because of weaker seasonal demand. In the short-term, demand is expected to slow due to refinery maintenances at the end of the northern hemisphere winter season.

The U.S. Energy Information Administration (EIA) expects U.S. output to rise to an average of 10.59 million bpd in 2018, and then 11.18 million bpd by 2019. This could be more than top producer Russia, which pumped on average 10.98 million bpd out of the ground in 2017.

Disney Parks Help Beat Earnings Estimate

Walt Disney Co, which is buying some of Fox's film and TV units, on Tuesday reported better-than-expected earnings, but revenue missed expectations, as the number of visitors at its theme parks and resorts helped offset another drop in ESPN subscribers.

Earnings were reported to be $1.89 per share, beating analysts’ average estimate of $1.61. Disney's revenue rose 3.8% to $15.35 billion Analysts on average had expected a revenue of $15.46 billion. The company's shares rose 1% to $107.28 in after-market trading.

Revenue from Disney's parks and resorts business rose 13.2% to $5.15 billion, beating analysts' average estimate of $4.87 billion, according to Thomson Reuters I/B/E/S.

Revenue from the company's cable networks business, which includes ESPN and the Disney Channels, rose 1.5% to $4.49 billion, missing analysts’ expectations at $4.51 billion. Regarding ESPN, Disney’s intends to add smaller, cheaper bundles of channels delivered online in order to reach more consumers.

As shown from the report, Disney's cable division has been under pressure from viewers switching to streaming services such as Netflix Inc and Amazon.com Inc's Prime, or what the industry calls "cord-cutting".

As a counter, Disney said in August it would develop its own streaming services to grab digital viewers who are dumping traditional television. In December, Disney announced the acquisition of the film, television and international businesses of Twenty-First Century Fox Inc for $52.4 billion in stock. This deal would also give Disney majority control of Hulu, the major rival of Netflix, which is also partially owned by Comcast Corp and Time Warner Inc.

The recent corporate tax cuts in the US have helped the media conglomerate recorded $1.6 billion gains.