Morgan Stanley's Impressive Q1 Bolsters Confidence, But Volatility Remains High

A blowout quarter from Morgan Stanley MS appears to be soothing investors still reeling after yesterday’s surprise miss by Goldman Sachs Group Inc GS. Futures trading indicated a possible higher open, but keep an eye out for more intraday volatility.

MS, the last of the big banks to report, crushed Wall Street analysts’ Q1 estimates, with sales and trading revenue beating expectations.

Keep in mind that the GS results represented just one quarter. For the most part, big bank earnings have been pretty healthy, and financials are among the best barometers of the overall market. Also worth noting is that while it’s still early in earnings season, just over 75% of reporting companies have beaten Wall Street analysts’ expectations. Only around 10% of companies have reported, but earnings are off to a good start.

Part of the problem for GS might have been the low-volatility environment that dominated in Q1. Low volatility, particularly in the dollar-euro trade and crude oil, might have hurt GS more than other banks because of the company’s oversize interest in those areas compared to its peers.

Volatility seems to be picking up, which could help trading volume at GS and other banks as well. Though the VIX did fall back under 14 early Wednesday, it’s possible that international issues like the French election (see below) and North Korea could play into more of the intraday volatility we’ve been seeing.

The market is in a volatile stretch, going up one day, falling the next, and in thin volume. Earnings remain a key driver, but there’s not much other data to trade on. That means geopolitical developments can sometimes get over-played because people are looking for something to trade. Investors might want to be careful, because sometimes this sort of up-and-down action comes ahead of a big break-out one way or the other.

Amid the geopolitical uncertainty, 10-year Treasury yields fell to their lowest levels in five months, dropping below 2.2% and staying under that level early Wednesday. The bond market might also be drawing support from bearish economic data. Neither industrial production (see below) nor new housing starts — both released Tuesday— did much to change the tone of the conversation about the economy possibly going through a soft patch.

The only economic report this morning showed mortgage applications falling 1.8%, possibly a bearish sign for the real estate sector, especially after the weak housing starts data yesterday. This afternoon brings the Fed’s Beige Book, so keep an eye on it to see what Fed officials have to say about economic conditions in various regions around the country.

In earnings elsewhere, International Business Machines Corp. IBM came in with somewhat disappointing Q1 results this morning, putting pressure on its shares. American Express Company AXP, CSX Corporation CSX, and eBay Inc EBAY report after the close. Verizon Communications Inc. VZ is among the major companies reporting tomorrow morning before the open.

More Disappointing “Hard” Data

There’s been some talk about the divergence between so-called “soft” data like consumer and business confidence, which have been high; and the hard economic numbers, which have been on the soft side. The question is whether those confidence numbers might translate into better retail sales, inflation, and even gross domestic product (GDP) at some point. Tuesday’s industrial production data from the government didn’t show much sign of soft data translating into hard, so to speak. The March number was up 0.5% from February, matching Wall Street analysts’ expectations as measured by Briefing.com, but a look beyond the headline didn’t reveal much to be excited about. Most of the boost came from the utilities component, which may have reflected cold March weather. Manufacturing output actually fell 0.4% during the month, and the government made downward revisions to the January and February manufacturing numbers.

What’s Blocking the Road?

One reason the manufacturing component of industrial production sagged last month was a nearly 4% decline in motor vehicle assembly. The automobile market had a rough start to the year, judging from sales numbers and the continued manufacturer focus on rebates. This follows a few years of really strong times, and could help explain why prices of iron ore — used in steel production — are near six-month lows. The thing to keep in mind is that while auto sales have slumped a bit, they’re still on pace to be pretty good overall this year, just not at recent record highs. For more “hard” data on the economy, keep an eye on Thursday’s leading indicators report from the Conference Board. This metric has had a really strong start to 2017 and hit its highest level in more than a decade in February.

French Vote On Tap

A strong showing in Sunday’s first voting round by either the far left or far right candidates in France has the chance to really unsettle markets, especially on the currency front. France has been a cornerstone of the euro, but a big vote total for a candidate who wants the country to abandon the currency could inject some real uncertainty into not just the Euro and European stock markets, but also into markets around the world. It’s important for investors not to panic around events like this and last year’s Brexit, but it might provide some reason for caution until there’s a better sense of the ultimate outcome.