Last week ended on a strong positive footage, on hints that some Federal Reserve (Fed) officials have started talking about pausing the interest rate rises to avoid going too far.
Chicago Fed’s Evans warned that pushing the Fed funds beyond 4.6%, from around 3 to 3.25%, would ‘really begin weighing on the economy’, while San Fransisco Fed President Daly said’ it’s time to start planning for stepping down’ to avoid pushing economy into an ‘unforced downturn’.
Fed members starting to look hesitant on the pace of the rate increases is a positive development for investors, even though it doesn’t change the expectation that the Fed will raise its rates by another 75bp at its next policy meeting next week.
Softer Fed comments & better-than-expected earnings fuel optimism
Softer Fed expectations pulled the US 2-year yield to 4.42% on Friday, from above 4.60% seen earlier last week, the US 10-year pulled to 4.15%, from above 4.30%, the US dollar retreated, and equities rallied. The S&P00 jumped 2.40%, and 4.70% over the week, the Dow Jones advanced 4.9%, while Nasdaq advanced 5.2%.
70% of the S&P500 companies that reported earnings so far did better than earnings expectations.
Besides, China – finally – announced its Q3 GDP- The Chinese economy grew 3.9% last quarter, above the 3.4% expected by analysts, but the year-to-date growth fell to 3%, below the official target of around 5.5%. The gap is due to China’s impossible Covid zero mission, which has been confirmed and cemented with the Xi’s third term in office. Appetite in Chinese stocks remain low; despite the rebound in major US indices, Nasdaq’s Golden China Dragon index extended losses last week
Big tech and big oil earnings
Many big US tech companies will be reporting earnings this week. Among them, Google’s Alphabet and Microsoft are due to report on Tuesday, Facebook’s Meta on Wednesday, Apple and Amazon on Thursday. Then, Exxon Mobil and Chevron are due to report their earnings on Friday.
GM, Coca-Cola, UPS, Visa, Boeing, Kradt Heinz, Ford, Hilton, McDonalds, Caterpillar, Altria and Intel will also be going to the earnings confessional this week.
So, the week will be busy, and perhaps a volatile one!
Walking into important earnings, it’s important to note that the latest stats warn of high correlation between the S&P stocks. The S&P’s 3-month realized correlation is now at the highest levels since July 2020. The latter makes this week’s Big Tech results even more crucial for the overall market mood, as Apple, Microsoft, Alphabet and Amazon, together, stand for 20% of the S&P500’s total valuation.
We will see how the tightening monetary conditions, slowing global demand due to high inflation, and Chinese Covid zero policy, and the strong US dollar impacted the big US companies’ earnings, and how they will impact the overall market mood.
Sunak is the frontrunner as BoJo pulls out
Boris Johnson announced yesterday evening that he will not be running for the PM role this week. That makes the British ex-Chancellor of Exchequer Rishi Sunak the front runner in the contest.
Sterling kicked off the week on a positive note, mostly on the back of a broadly softer US dollar, but the 50-DMA, which stands around 1.1410 level, has already showed its teeth, and shelters strong offers to a further positive move.
No one expects the British pound, and the sovereigns to magically shrug off the past weeks’ turmoil. Investor confidence has been severely damaged, and it will take time to build it back, if everything goes perfectly well.
Who will hike, who will not?
The Bank of Canada (BoC) is expected to raise interest rates by another 50bp when it meets this week, the European Central Bank (ECB) will certainly raise its rates by 75bp, while the Bank of Japan (BoJ) is expected to stay pat.
The BoJ intervened again in the currency markets on Friday to pull the USDJPY lower, after the pair flirted with the 152 level last week. The pair eased to 145.50 following the intervention and is back to almost 149 at the time of writing.
But the growing divergence between the soft BoJ stance versus an increasingly hawkish stance from the rest of the G7 central banks should continue playing against the yen. Therefore, price pullbacks could offer interesting dipbuying opportunities for those who continue betting against the yen.
In commodities
US crude kicks off the week around $85per barrel level and could test the 50-DMA offers to the upside if the overall market sentiment remains bullish enough. But strong resistance is seen into the $93/95 range as rising oil prices fuel recession expectations and could jeopardize any strong oil rally into the $100pb level.
Gold jumped 1.80% on Friday on the back of softer US yields. Softer US yields could play in favour of gold if we really start seeing material easing in Fed expectations. But the latter is data dependent.
Due this week, investors will closely watch the US latest GDP update, and the PCE index, which is another gauge of inflation, closely monitored by the Fed. A strong GDP, and/or a strong PCE could easily fuel the Fed hawks, send the US yields and the US dollar higher, equities and gold lower.
From a price perspective, $1690/1700 per ounce range will be an important test for gold, as it includes the 50-DMA, March-to-date descending channel top and an important psychological resistance.
For now, the medium-term outlook for gold remains bearish, with the possibility of a further dive below the $1600 level.
