Will Amazon’s results be too good to be true, and could Japan trigger a flash crash?

Financial markets have had a buoyant few days post the Easter break, with the S&P 500 and the Nasdaq making fresh record highs on Tuesday. So far, investors have been unwilling to sell these rallies, suggesting that demand for stocks remain high and another leg higher in the stock market rally could be on the cards. However, we believe that there are two big risks to stock markets in the next few days: Amazon and Japan. 

Firstly, we need to briefly understand why stocks are back at record highs in the first place, and why the rally in Q1 is extending into Q2. Mostly, it is down to a reduction in worries, long gone are fears over trade spats and the Fed hiking rates too fast, which rocked markets in December. Instead, central banks around the globe are shifting to a dovish stance, with the Fed firmly pressing the pause button, fears about Chinese growth came to nothing and the first quarter earnings season has seen more than 75% of companies in the S&P 500 beat analyst expectations. However, while the long-term picture looks strong, there are a few short-term hiccups that could knock investor confidence. 

Why Amazon earnings could disappoint 

In the next 24 hours, three of the world’s largest companies will report their earnings: Microsoft, Facebook and Amazon. Arguably, Amazon will be the most closely watched once it releases its earnings figures after the market closes on Thursday 25thApril. All 45 analysts surveyed by FactSet prior to the earnings release are bullish; when the crowd is all heading in one direction, this can be when the contrarian wins out. Worth noting, opver the last two earnings reports Amazon shares have fallen 5.4% and 7.8% respectively, however, the they have quickly bounced, and Amazon’s share price is up 28% so far this year. 

What to watch for in Amazon’s earnings report 

The key figures to watch are earnings per share, which is expected to rise to $4.70, up from $3.27 last year, revenues are also expected to surge to $59.68 billion, up from $51.04 billion in 2018. Analysts may cheer any sign that revenue growth is stabilizing for Amazon at the same time as it continues to make investments in its business empire. This would keep Amazon firmly in the category of a “growth stock”, which could fuel another leg higher for its equity price. As with most tech companies advertising streams of revenue are vital, we expect analysts to focus on whether Amazon’s advertising revenues are large enough, and if they are, then this could be cheered by the market. 

Is Amazon a victim of its own success? 

This all looks positive, so why are we concerned that Amazon’s stock price is at risk? Our reason is that it all looks too good. When market sentiment is this positive, it doesn’t take much to knock investor confidence, so one small set back in earnings may trigger a rush to the exit. As we mentioned above, Amazon’s share price has a tendency to fall on the back of earnings releases, although we believe that any decline could be short-lived, as we believe that Amazon’s long-term growth story remains strong. 

Why dollar strength is muted vs. the yen  

Investors have been ploughing into US assets in recent days, the dollar index also reached its highest level for 10 months earlier this week, rising above the key 97.70 barrier. Interestingly, its gains were mostly against the pound and the euro, against the yen FX traders were more cautious. Although USD/JPY has now broken above the key 112 level, it took some time to do so. This caution is most likely down to Japanese investors reducing long dollar positions ahead of their 10-day “golden week” holiday that starts this Friday. This holiday, to mark the Emperor’s abdication in favour of his son, will leave equity and bond markets out of action, and the vast majority of Japanese investors will be away from their desks. The problem is that the FX market remains open, and during Asian hours, with Japan away, we could see long periods of low liquidity and thus unstable FX markets for the next week or so. This can be dangerous, back in January, the last time the Japanese were out for a prolonged period, there was a  3% surge in the yen vs. the US and Australian dollars, which wiped out some retail investors trading on margin. Due to this,  Tradefair clients need to be wary of rogue FX moves in the coming days, and we would advise clients not to hold unhedged positions overnight.

Why flash crash fears are justified  

Fears of a flash crash are one reason why the yen has fared well vs. the dollar in recent days, and we may see further squaring up of positions by Japan’s army of retail FX traders, thus don’t write the yen off just yet. If there is a flash crash then fear not, options in USD/JPY calls are targeting a 109-strike price. So, if there is a sharp move higher in the JPY in the coming days, 109 in USD/JPY could be where the dollar buyers come back in to the market. 

US growth story is the toast of the developed world 

Also, worth noting, US Q1 GDP is released on Friday, the market is expecting a 2.1% rate of growth. If expectations are correct, then we could see the dollar index extend gains against other currencies apart from the yen, as it would further enhance the US’s reputation as one of the only developed world economies with steady growth. 

As this note draws to a close, we are delighted to announce that for a second time we have not mentioned Brexit, and UK politics does not appear to be the major driving force of global financial markets; how refreshing!