Risk Makes a Comeback

Red was swapped out in favour of green on Tuesday as signs of economic stabilization in China and, more importantly, a recovery in the price of oil helped Asian and European markets register substantial gains. US markets were mixed on the day, with the NASDAQ slipping as Intel, Netflix and IBM dampened the mood.

Tuesday had all the hallmarks of a risk-on day, as investors sold safe haven assets in favour of riskier ones, mostly energy stocks and energy-related commodities. Crude oil was up by more than 3%, and copper also registered solid gains. Shares in energy stocks such as Anglo American, Glencore, Rio Tinto and BP rose as much as 4%, although the top performer in Europe was L’Oreal, up 4.6% as the French cosmetics company registered higher-than-expected first quarter sales.

Riskier currencies were also in demand. The Aussie and New Zealand dollars hit 10 month highs against their US counterpart, and the yen gave up ground for a second day running. The Canadian dollar also registered gains.

Overall, the worries about global growth and oil oversupply diminished, helped by a strike in OPEC member Kuwait. Oil workers entered a third day of strikes as part of their protest against an upcoming public sector pay reform. Kuwaiti output fell by almost 50%, although analysts expect the disruption will be brief as strikes are typically temporary in nature. Did someone say temporary? The strike ended this morning and oil prices have fallen 2% so far…

In any case, the main theme in the oil market is the issue of oversupply. The issue failed to be addressed over the weekend in Doha, and is likely off the table for now. Iran has repeatedly stated it wants to ramp up production, but post-Doha other countries seem to have similar interests. Russia and Venezuela have indicated that they hope to increase output this year, although it sounds like an increasingly difficult task for the South American country given the chronic power outages plaguing the nation.

Tech Takes a Tumble

The tech sector had a bit of a bruising as IBM and Netflix fell more than 6% and 11% respectively. The streaming giant saw its shares tumble after it forecasted a significant slowdown in customer subscriptions for the coming quarter. Other results by Netflix – such as revenue and earnings per share – came in around or above market expectations, but subscriber growth is a key indicator for Netflix. The company said the continued expansion and development of Netflix resulted in some fluctuations in subscriber growth patterns which would eventually normalize.

News wasn’t much better over at IBM, whose ongoing efforts in cloud products and artificial intelligence were not enough to halt a 4-year slump in sales. Sales for the first quarter of 2016 were $18.7 billion, beating analysts’ estimates of $18.2 billion, but nonetheless registering a drop for the 16th consecutive quarter. In a recent reporting revamp, sales in what IBM calls ‘strategic imperatives’ - cloud, analytics, social, mobile and security products – registered double digit growth but still could not offset the decline in IBM’s legacy business.

Intel hammered another proverbial ‘nail in the coffin’ of the PC industry as it announced 12,000 job cuts to help offset declining PC sales as it shifts its focus towards smart devices and cloud computing. The company expects cost-savings of around $1.4 billion over the next two years. The news was announced as Intel posted first-quarter earnings that came in below Wall Street estimates. Shares were only slightly down on the day.

All companies are in good company however. Goldman Sachs, the worst performer in the Dow Jones Industrial Average in 2016, posted a 60% drop in first quarter profit. The banking giant has taken on one of the Street’s biggest cost-cutting efforts, which has yielded some results in terms of better earnings-per-share. The question is whether that will be enough to satisfy investors in the long-term, given the bleak global outlook and the drop in revenue from trading and investment banking which have hit a four-year low. In one of the few positive takeaways, Non-compensation costs fell to a seven-year low, as a result of lower provisions for litigation and other regulatory matters.

This article was issued by Andrew Martinelli, Trader at Calamatta Cuschieri. For more information visit, www.cc.com.mt. The information, view and opinions provided in this article is being provided solely for educational and informational purposes and should not be construed as investment advice, advice concerning particular investments or investment decisions, or tax or legal advice. Calamatta Cuschieri & Co. Ltd has not verified and consequently neither warrants the accuracy nor the veracity of any information, views or opinions appearing on this website.