PayPal, Starbucks, And Electronic Arts Underperform Alphabet And Advanced Micro Devices

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(Wednesday Market Open) Equity index futures are pointing to a higher open led by tech stocks, with the Nasdaq futures trading 1.69% higher before the open. Alphabet GOOGL and Advanced Micro Devices (NASDAQ: AMD) reported positive earnings after last night’s close, which appear to be prompting the rally. After today’s close, another big internet company will report earnings—Meta Platforms (FB), the parent company of Facebook and Instagram.

After Tuesday’s close, Alphabet GOOGL announced better-than-expected earnings and revenues that lead to a rally more than 7.8% in extended-hours trading. The company reported higher-than-expected revenue from search traffic and cloud services but fell short on YouTube advertising revenue.

Another nice surprise from GOOGL was the announcement of a 20-for-1 stock split in July. This could be a win for retail traders because it allows them to buy shares without having to devote so much capital to one investment. There are many other stocks that could split and help investors gain opportunity without sacrificing diversification.

Advanced Micro Devices (AMD) also reported after the close and soundly beat earnings estimates, leading to a rally of 10.29% in after-hours trading. AMD saw record revenues that rose 49% over the previous quarter and 68% from a year ago. Additionally, the company laid out a really nice earnings outlook, which may help the struggling semiconductor group.

While Alphabet and AMD rallied on their earnings reports, other companies haven’t been so lucky. PayPal (NASDAQ: PYPL) missed on earnings estimates despite beating on revenues and gave a weaker-than-expected earnings outlook. Payments grew at 24%, but it wasn’t good enough for expectation. Additionally, PYPL lost its partnership with eBay (NASDAQ: EBAY). The report led to a 15.57% sell-off after the bell. Starbucks (NASDAQ: SBUX) also missed on earnings and fell 4.67% in after-hours trading. Electronic Arts (NASDAQ: EA) fell 1.69% after reporting misses on top and bottom line numbers.

We’ve spent a lot of time looking at oil prices in order to track rising inflation and rightfully so; the oil commodity markets are by far the largest in the world. It dwarfs all the other commodities. However, corn futures have risen about 29% off September lows. Soybean oil futures are more than 30% from December lows. And soybean meal is up 43% from its October low and is currently on a six-day win streak, returning about 14%. The moves in these commodities are being reflected in some of the related stocks. For example, Archer-Daniels-Midland (NYSE: ADM) is up about 10% in the last two weeks.

Before the Close

On Tuesday, stocks were able to build on Monday’s rally thanks to a late-day push, but the major indices may be butting up against resistance levels that could slow the growth. The S&P 500 (SPX) rose 0.69% and appears to be trading near resistance around September 2021 highs and November and December bottoms. The Nasdaq Composite ($COMP) rallied 0.75% and is also trading around similar levels of resistance and has made up 7% of its losses in the last three days. Confidence could be

Investors appeared to be bargain hunting in the riskier small-cap stocks, with the Russell 2000 (RUT) rising 1.10%. Investors were also interested in the inflationary sectors with energy, materials, industrials, and financials among the top sectors.

Hot Cross Bunds

The 2-year Treasury yield jumped after the ISM Manufacturing Purchasing Managers Index reported that manufacturing in the United States was stronger than analysts had expected. The sign of economic strength will provide the Federal Reserve with another reason to feel comfortable to start raising interest rates. In fact, if manufacturing is heating up, the Fed may need to act sooner and stronger; otherwise, it risks inflation elevating its pace. However, the 2-year yield gave back its gains as the day stretched on.

The event may seem rather insignificant if a similar event hadn’t happened overnight in the German 2-year Bund yield. The German Manufacturing Purchasing Managers Index was lower than forecasted but still reflected strong growth. Additionally, German unemployment fell by 48,000 workers. These economic announcements helped push the 2-year Bund yield to a seven-year high. The move also reverberated down the bund’s yield curve with the 10-year bund yield rising 2.5 basis points, which is just shy of its May 2019 and pre-pandemic high.

The reason why these moves are so interesting is that this means that the German market is expecting the European Central Bank (ECB) to raise rates at least twice in 2022. ECB President Christine Lagarde has been insistent that the bank will not raise rates this year despite European inflation exceeding the ECB’s expectations for several months.

The U.S. Dollar Index fell on the news as the euro strengthened against the dollar in the currency market. While the United States is expected to raise rates higher and faster than Europe, the dollar may not be the lone currency rising when others are trying to fall. 

CHART OF THE DAY: TOP DOLLAR. The U.S. Dollar Index ($DXY—candlesticks) failed to maintain a break over long-term resistance and is retreating. Data Sources: ICE, S&P Dow Jones Indices. Chart source: The thinkorswim® platform. For illustrative purposes only. Past performance does not guarantee future results.

Bottom Dollars: On Tuesday morning, we looked at the dollar and wondered if it would bounce back and what that might mean for U.S. stocks. Well, wonder no longer. With the U.S. dollar retracing, it could be a boost for U.S. companies selling product overseas and particularly in Europe. The weaker dollar should make U.S. product cheaper.

While there’s a lot of central bank policy changes still to be determined in 2022, the markets have been able to factor in the United States raising rates, and now it must adjust for a higher likelihood of Europe raising rates too. Additionally, there could be some drama as the European markets square off President Lagarde.

Vested Interest: The 10-year Treasury yield (TNX) hit its most recent peak on January 18 but has bounced between 1.7% and 1.85% for most of January. If investors want the dollar to weaken in order to help stocks rise, the range may need to stay strong. If the yield breaks above the 1.85% resistance level, then the higher yields will likely boost the dollar and be a drag on stocks.

TD Ameritrade® commentary for educational purposes only. Member SIPC.

Image sourced from Unsplash

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