Well folks, it’s the last week of October and that means the market only has a few more trading sessions to price in its sentiment for the rest of the year before its final FOMC meeting and the announcement of October’s employment data respectively on Wednesday and Friday; with the $VIX continuing to hold above 30 it's sure to a trader’s haven so read on for our recommendation on $DX as well as stories on Canada’s economic crossroads and President Xi Jinping’s recent consolidation of power given his ‘winning’ of a third term over the weekend.
Markets in Review
It’s shaping up to be a green day with premarket futures on the Dow, S&P and Nasdaq gaining 73, 72 and 52 bps at the time of writing. After Friday’s 2.36% gain, the S&P has finally put some solid distance between itself and the 3600-point support level - additionally, barring any negative developments within the Russia-Ukraine conflict, the slew of industry titans reporting earnings this week could serve as a further catalyst for higher prices before next week’s FOMC meeting and jobs report.
We’ll have a close eye on $GM, $KO, $MSFT, $GOOG, $VISA, $META as well as many more as they announce over the week - read on for a review of this Q3 reporting period’s data as well as the most anticipated issuers this week: Earnings Scorecard: For Q3 2022 (with 20% of S&P 500 companies reporting actual results), 72% of S&P 500 companies have reported a positive EPS surprise and 70% of S&P 500 companies have reported a positive revenue surprise. Earnings Growth: For Q3 2022, the blended earnings growth rate for the S&P 500 is 1.5%. If 1.5% is the actual growth rate for the quarter, it will mark the lowest earnings growth rate reported by the index since Q3 2020 (-5.7%). Earnings Revisions: On September 30, the estimated earnings growth rate for Q3 2022 was 2.8%. Six sectors are reporting lower earnings today (compared to September 30) due to downward revisions to EPS estimates and negative EPS surprises. Earnings Guidance: For Q4 2022, 9 S&P 500 companies have issued negative EPS guidance and 6 S&P 500 companies have issued positive EPS guidance. Valuation: The forward 12-month P/E ratio for the S&P 500 is 15.6. This P/E ratio is below the 5-year average (18.5) and below the 10-year average (17.1).
Short: Dynex Capital, Inc. (DX-NYSE) | Timeline: 2 days
Dynex Capital, Inc. (DX), a mortgage REIT that invests in mortgage-backed securities (MBS) on a leveraged basis, is set to report earnings today and things aren’t looking too great leading into the market opening. The company missed earnings and revenue estimates of 26.09% and 71.35%, as rising rates have led to a lower net interest margin and a devalued MBS. (Full Story) Referring to the chart, DX stock hasn’t suffered from much volatility up until earlier this year as the federal reserve continued to battle severe inflation. That said, traders caught wind of how a mortgage REIT may suffer from this economic environment, resulting in substantial selling leading into this quarter’s earnings report. Shares have now consolidated between $11 and $12, and price action has formed a pennant while the stochastic RSI is sitting at extremely overbought levels, giving traders the opportunity to capitalize on this bearish sentiment.
Zooming out...
Canada’s Economic Crossroads: After going through the same troubles as much of the developed world over the past two years, the Bank of Canada has been forcefully hiking rates. With the current overnight rate of 3.25% matching the Federal Reserve’s, many believe that the BOC will announce another hike this week at their Wednesday meeting. They may be right to do so, as inflation last came in at 6.9%, and Canadians are feeling the hurt in other places, namely groceries, as they cost roughly 11.4% more when compared to a year ago. The government is also launching a ‘greedflation’ investigation into grocery chains as similar scandals have occurred in the past, most recently with a decade-long bread price-fixing scam. (Full Story) The BOC has proven before that they are willing to make bolder moves than their southern neighbours, and this week should not be treated any differently. We assume that either a 50bps or 75bps hike will be announced, with more favour towards the 75bps side. China’s Power Consolidation: President Xi Jinping has officially won his third term after this week’s CCP conference. While bolstering his supporters, Xi also maneuvered against potential foes. Although it was the basis of our featured meme, the seriousness of Hu Jintao being escorted away is significant. For those who don’t know, Hu Jintao was Xi’s predecessor and was the man who led the first peaceful transition of power in recent Chinese history. Xi’s actions could be an attempt to clear the board of any viable successors, with the added benefit of sending a strong message to those who would come out of the woodwork to challenge him. Chinese markets are reacting poorly to the leadership changes as the Hang Seng Index has fallen over 6.4% through the overseas trading day.
Making headlines...
Korean border tensions heat up with warning shots near the disputed sea border
The two Koreas fired warning shots at each near a nautical border after Seoul said a merchant vessel from its neighbour crossed the line, adding to a recent series of provocations along one of the world’s most militarized boundaries. (Full Story)
Tesla Cuts Prices in China Following Signs of Softening Demand
Tesla Inc. lowered prices across its lineup in China, looking to stoke demand in a market where competitive and economic pressures are intensifying. (Full Story)
Credit Suisse to pay $234M to settle French tax fraud case
French prosecutors said Monday that Credit Suisse has agreed to pay 238 million euros ($234 million) to settle tax fraud allegations, the latest blow for the embattled Swiss bank. (Full Story)
Next U.K. prime minister: Sunak closes in after Johnson balks
Former Treasury chief Rishi Sunak is a strong favourite to become Britain's next prime minister within days -- or even hours -- after former leader Boris Johnson dropped out of the Conservative Party leadership contest. (Full Story)
Chart of the Day: Tesla's Revenue Relative to OPEX…
“When something is important enough, you do it even if the odds are not in your favour."
- Elon Musk
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