Global stocks experienced a slow start to the week, with European and US stocks falling on Monday. The FTSE 100 defied this trend, nearing last week’s highs, boosted by AstraZeneca’s and the LSE’s performance.
AstraZeneca’s shares rose after its hypertension drug met all targets in a late-stage trial. The company anticipates the drug could generate $5 billion yearly and strengthen its M&A division, following the acquisition of CinCor Pharma in 2023.
Crypto Market Surge
In the US, crypto-related stocks surged as Bitcoin hit a record high above $121,000. The House of Representatives is set to consider important industry legislation, potentially expanding Bitcoin’s use and impacting the digital currency market.
US equities face a pivotal week as earnings season intensifies, with JP Morgan, Goldman Sachs, and Netflix among those reporting. Analysts have lowered earnings expectations due to economic concerns, with the energy sector experiencing the largest cuts.
Some companies remain optimistic, with the tech sector issuing mixed guidance, indicating potential divergence in performance. The banking sector’s earnings reports will be analysed for profits and loan loss provisions, which could shed light on the US economy and consumer health.
The KBW banking index in the US has surged 44% since April’s low, remaining close to 2022’s record highs. Around 40 S&P 500 companies, including notable names like Pepsi Co and United Airlines, are set to announce earnings this week.
Netflix Earnings Expectations
Netflix’s earnings report will attract significant attention as the first major tech company to report. Analysts predict revenue of $11.04 billion, an increase from Q1, with net income forecasted to rise to $3.17 billion. Netflix’s stock has historically increased after earnings reports, maintaining optimism for Q2 and Q3 revenues.
Given the market’s divergent start, we believe derivative traders should be positioning for a spike in sector-specific volatility rather than betting on broad market direction. The placid surface, evidenced by a CBOE Volatility Index (VIX) that has stubbornly remained below 15 for much of the past month, masks significant underlying tensions that are ripe for exploitation.
The strength shown by the pharmaceutical giant after its drug trial success is a clear signal. We see this not just as a stock-specific event, but as a catalyst for the healthcare sector. Implied volatility on healthcare ETFs like the XLV has been relatively subdued. We are considering long-dated call options on select pharma names with strong pipelines, a strategy that captures potential upside from further M&A activity, as hinted by the company’s own division, while strictly defining our risk.
On the crypto front, the situation is electric. While the source mentions a record high, the reality is that Bitcoin retreated from its March 2024 peak of over $73,000 and has been consolidating. This consolidation ahead of major legislative moves, like the FIT21 Act which passed the House in May, is building immense potential energy. For traders, this isn’t about picking a direction. The elevated premiums on options for crypto-linked ETFs and stocks like Coinbase signal that the market is expecting a violent move. We are looking at straddles or strangles on these names, positioning to profit from a breakout in either direction once regulatory clarity or a new narrative takes hold.
This earnings season is the primary battleground. While analysts may have trimmed forecasts, FactSet data shows that the estimated year-over-year earnings growth for the S&P 500 in Q2 is still a robust 9.0%. This sets up a classic “beat the lowered bar” scenario. The banking sector is particularly interesting. The surge in the banking index has been impressive, but it hinges on net interest margins. With the Fed’s rate path still uncertain, we will be dissecting the reports from the big banks for any change in guidance on loan loss provisions. In Q1 2024, major US banks collectively set aside over $9 billion for potential bad loans; any deviation from that trend will move the sector. A pairs trade, going long a bank showing strong investment banking recovery against a short on a regional player more exposed to commercial real estate, could be an effective play.
Finally, the report from the streaming service will set the tone for tech. Historically, the stock has an average post-earnings price move of roughly +/- 10%. With current analyst consensus looking for nearly 4 million net subscriber additions for the quarter, any surprise there could easily trigger such a move. This is a textbook scenario for selling option premium via strategies like an iron condor if we believe the move will be less than the market expects, or buying a straddle if we anticipate an outsized reaction to their forward guidance on ad-tier revenue and password-sharing clampdowns.
