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Trading Cash Indices During Earnings Season

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The third-quarter earnings season has started. And, with it, the dynamics of the market have changed!

This is a regular occurrence that affects all cash markets, though evidently the most it affects is the stock market.

But, just like forex often moves opposite to the stock market, forex and even commodities can be affected by earnings season.

Here are some things to keep in mind about trading during this time, and what might come up over the next few weeks.

What & When

Earnings season is an unofficial period in which the vast majority of major corporations issue their quarterly reports.

This is all over the world, though the exact practices vary, depending on the circumstances.

For example, US companies report their entire earnings by law. French companies usually only report their revenues. UK companies issue trading updates, and Japanese companies report their key financial metrics.

Evidently this can make the stock of each company go up or down, and depending on the size of the company or sector, it can move the whole market.

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For example, Apple is a leading tech company. If it reports sales below estimates, it can drag down the Nasdaq and weigh on the prices of its suppliers, chipmakers, tech companies and competitors. It’s not unusual for a drop in Asian stocks to be attributed to a negative report from a major company, such as Amazon, Alibaba, Tencent or even Walmart.

The third-quarter earnings season is usually the shortest and lasts from around mid-October to mid-November. This time around, it kicked off on the 15th with major US banks reporting. We can expect it to wind down in the week of November 18th, with the last major European companies reporting.

What Are We Looking For?

The third-quarter is usually when major companies start giving guidance for the next year. The key bit here is capital expenditure: how much companies are planning to invest in the coming year. This has a direct impact on economic growth, and inflation expectations.

Now is when companies tweak their budget for the year, depending on whether they’ve met their targets; and decide how much they are projected to spend next year.

If we see companies increasing their capital expenditure, this means they are going to need more money. Bond yields will likely rise, currencies can be supported, and central banks are less likely to cut rates. And, of course, vice versa.

Some Sectors of Interest

A theme that has been noticed so far is a significant drop in banking profitability as a consequence of the lower rates around the world. This puts a strain on the banking sector, making some already vulnerable banks at a higher risk of default or bankruptcy, raising the specter of a financial crisis. The subsequent market uncertainty can lead to a demand for safe-haven assets, currencies, and commodities.

In that line, CEOs have the best insight into their market, and how it’s developing. Following the inversion in the bond yield curve and the fact it’s been so long since the last recession, people are looking for where the cracks in the system might be.

Is the auto loan sector under increased stress? Look for car retailers, and auto loan specialist reports for more insight. Is the housing market about to burst again? Lennar’s quarterly report can help ease concerns or set off alarms. NZD traders will probably be interested in what Danone and Nestle’s outlook are for the dairy market.

What to Expect From Trading

Market volatility tends to increase during earning season across cash markets. This is good for day traders, but it can also increase the risk. And let’s not forget that we get a host of quarterly data coming out during this period as well, such as major GDPs.

Earnings season reaches its height at the month, after which hedge funds and major investors assess their positions and take profit from the summer ahead of tax payment dates.

Given that Brexit remains unresolved, pending negotiations between the US and China, tensions in Syria, political issues in the US, continuing unrest in Hong Kong, and now spreading protests in Latin America… we’re in for a busy season.

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