As we discussed the potential for a rebound in our report yesterday, the markets have in fact gone up from oversold levels. Europe was doing particularly well this morning, with the major indices being up more than 2% each, as travel stocks and banks rallied. The positive sentiment also helped cryptos come off their recent lows, while crude oil extended its rally for a second day after its recent pause. The key question remains though as to whether this is the start of another major rally, or just a short-squeeze bounce, before we see further volatility. Either way, I am continuing to expect outperformance from European markets – whether that means they will rise faster or fall slower than their US counterparts in the short-term outlook.
Over to you, Powell
Investors’ attention will now turn to on one of the main sources behind all this the volatility: The US Federal Reserve. At 19:00 GMT, we will get to hear exactly how hawkish the Fed and its chairman are in their determination to rein in on surging inflation. There has been some speculation that Jay Powell could tone down his hawkishness in light of the big stock market sell-off. But how likely is that? I certainly don’t expect to see too much of a walk back from Powell on the Fed’s hawkish intentions. My feeling is that Powell is not going to change its tone in the slightest, despite the recent volatility observed in US stock markets. He has a job of managing expectations and there is no point in talking down the prospects of three or four rate hikes this year if they then end up having to tighten policy aggressively anyway. Indeed, if a March hike is on the cards, it is better to prepare investors for such a move now rather than later. Mind you, this on its own won’t come as much of a surprise. But should the fed go a step or two further – for example, by providing hints on shrinking its huge $8.87 trillion balance sheet – then that could spook the market.
More tech earnings to come: Tesla tonight and the Apple
Microsoft’s upbeat forecast for the current quarter saw its shares reverse a 5% drop in after-hours trading last night to turn higher, after its fourth quarter results failed to impress investors initially. Tesla and Intel will enlighten us with their results tonight, while bellwether Apple is set to release its results on Thursday. These companies better deliver some positive surprises to provide confidence that the latest rebound is not on a shaky footing.
Indeed, expectations are sky-high for Tesla. The electric carmaker saw its share jump to $1200 at the start of the year after it delivered more than 308,000 vehicles in the fourth quarter, well past the 270,000 units that were expected. Subsequently, analysts have boosted their earnings and sales expectations in recent weeks. For the fourth quarter, Wall Street is now expecting earnings of about $2.33 a share and sales of $17.10 billion. TSLA has come back down in recent weeks along with the tech sector. But following this week’s rebound, the stocks is set to open around $957 today.
European markets could cheer stock market bulls
Providing boost to the stock markets is optimism that the economic recovery is going to speed up in the months ahead. Travel restrictions continue to ease across Europe as omicron cases decline and more people get double or tripled vaccinated. There is a lot of pent up demand for holidays within Europe. Hopefully, we will see confidence returns and people start going on holidays more often this year. So, I certainly am feeling positive towards the European stock markets compared to Wall Street. Indeed, European markets are more likely to suffer smaller setbacks going forward because unlike the Fed, the ECB is going to keep printing more QE money for longer.
