On Friday, US stocks surged over 2% after the Bank of Japan (BoJ) unexpectedly cut interest rates and Microsoft led a major advance in technology shares, repairing some of the damage to the S&P 500's worst January since 2009. During the week, markets were impacted by collapsing oil prices that have fueled doubts about the health of the global economy. At one point, the S&P's loss for 2016 reached 11% before recovering to end the month down 5%. The index increased 2.48% on Friday, its strongest day since September.
Analysts noted that investor sentiment has moved wildly negative. This is largely due to the instability in the world outside of the US, as US economic figures – although modest – have been fairly stable. However, global markets got a surprise boost on Friday after Japan's central bank cut a benchmark rate below zero to stimulate its economy.
Stocks were also lifted by weak 4th quarter US gross domestic product growth data, which sparked arguments that the Federal Reserve might go slower than expected on future rate hikes. While the Fed has not ruled out a rate hike in March, many traders believe recent global economic and financial turmoil may lead it to wait.
4th quarter corporate reporting season is well under way, with S&P 500 companies on average expected to post a 4.1% drop in earnings, according to Thomson Reuters. Excluding energy companies, earnings are seen rising 2.1%. The Dow Jones industrial average ended 2.47% higher at 16,466.30 while the S&P 500 gained 46.88 points or 2.48% higher to end at 1,940.24. The NASDAQ surged 2.38% to 4,613.95. For the week, the Dow gained 2.3%, the S&P 500 added 1.8% and the NASDAQ increased 0.5%. That left the Dow Jones down 5.5% for the month and the NASDAQ 7.9% lower, its largest monthly loss since May 2010.
US crude oil increased 1.4% after some disappointing news when a report was released that said Iran would not participate in a possible deal between OPEC and other producing countries to reduce output.
Overall, the major indices were able to register their second consecutive weekly gain, but relative weakness in biotechnology and large corporations like Apple and Amazon kept the tech-heavy NASDAQ behind the broader market. Amazon reported below-consensus results while Apple beat estimates, but cautious guidance induced profit taking in their respective shares. Facebook and Microsoft provided some counterbalance in the NASDAQ after both reported above-consensus results.
However, it wasn't all earnings as the last week of January featured a fair dose of central bank talk and activity. The Federal Reserve released its January statement on Wednesday, leaving the door open to the potential of four rate hikes taking place before the end of 2016.
Eight sectors registered weekly gains between 0.7% (materials) and 4.3% (telecommunications), but only three groups ended January on the rise with consumer staples, utilities, and telecommunications experiencing respective monthly gains of 0.5%, 4.9%, and 5.5%. On the other hand, the materials sector was the weakest performer, falling 10.6% in January while energy saw the slimmest January decline, dropping 3.1%.
On Friday, Microsoft’s stock surged on Friday as traders reacted positively to the software company’s fiscal 2nd quarter earnings report out late Thursday. The company easily beat analyst targets for the December quarter, thanks to its rapidly growing cloud computing business.
Microsoft earned 78 cents a share on sales of $25.69 billion on a non-GAAP basis in its fiscal 2nd quarter. Earnings per share rose 11% year over year, while sales slipped 1.7%. Analysts expected 71 cents a share on sales of $25.26 billion. Excluding foreign-exchange impacts, Microsoft’s earnings per share would have been up 23% and its sales up 3%.
Microsoft is shifting its business from desktop software to Internet cloud computing infrastructure and applications. The transition should make Microsoft less reliant on PC buying cycles. Microsoft stock jumped 5.8% to close at $55.09 on the stock market on Friday, not far from an all-time high of $56.85 on December 29th, 2015.
Analysts are saying that Microsoft’s CEO Satya Nadella has navigated Microsoft into the Internet cloud faster and more successfully than its peers. Microsoft’s 2nd quarter results are evidence that its transition is working. The company’s Office 365 and Azure cloud offerings are particularly strong and are being welcomed by the markets.
Analysts highlight that Microsoft is benefiting from a couple of elements – its strong cash flows from its legacy Windows and Office products, and its explosive growth in its cloud offerings. This combination offers investors consistent cash flows and exciting growth.
The technology giant also posted strong results from its cloud computing business and the business unit that sells PC software and Surface tablets and Xbox game consoles.
While Office 365 subscriber base grew to over 20 million, Office commercial and consumer products and services revenue declined by 1% and 14%, respectively, due to the ongoing transition to Office 365. Office 365 commercial revenue was up by 70%, while Office 365 commercial seats grew by 59%. As the subscription model sets in, revenues for this division are expected to grow and become more recurring and predictable going forward.
Microsoft’s Windows Server division is one of the fastest growing divisions of Microsoft. During the 2nd quarter FY16, server products and cloud services revenue grew by 3%, driven primarily by growth in Microsoft SQL Server. Furthermore, adoption of the cloud-based Azure platform also increased as the company reported 140% growth in its revenues. Combined, the intelligent cloud segment (Azure, Server products and enterprise services) delivered $6.3 billion in revenues during the quarter.
On the week, Microsoft’s stock reached a weekly high of $56.08 in late trading on Thursday after it traded at a weekly low of $50.48 on Tuesday.
In the week ahead, end of year earnings season will continue and a range of corporate earnings will be released that are likely to cause movement in the value of these stocks. This includes earnings reports from Alphabet (Google) on Monday and ExxonMobil on Tuesday. From an economic perspective, on Tuesday, February 2nd motor vehicle sales will be released in the US. If this figure is on the rise, this could cause a boost in automotive stocks such as Daimler AG and Tesla Motors. As well, on Thursday, February 4th chain store sales and US jobless claims data will be released in the US. Chain store sales data will demonstrate if holiday season sales were beneficial to investors, since many will reflect 4th quarter earnings during the Christmas season. If chain store sales are on the rise as a result of this period, it’s likely that stocks from retail chains such as Abercrombie & Fitch Co will rise in response. Then, on Friday, February 5th, a statement by the US government on the employment situation, consumer credit and international trade will be released. If international trade is on the rise, this could demonstrate a growing US economy. As a result, we could see the value of US indices such as the S&P 500 and Dow Jones Industrial Average to rise.
For most global markets, January 2016 was a month full of turbulence and instability. No one really likes to start off a year with so much uncertainty but it has made for an interesting month in the markets for all of us across the trading community. With some positive earnings released at the end of the month, hopefully this is a sign of greater things to come as we head into a new month in the markets. Let’s see what February has in store for those of us who are trading binary options…
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