Fed & Tech earnings to dictate market’s next move
Equity markets kicked off the week on the back foot with most Asian indices falling, with Beijing continuing to crackdown on its domestic tech companies as it aims to reform the education tech industry. The 6.5% drop in Hang Seng tech stocks dragged Hong Kong’s main index down by more than 3% while China’s Shanghai Composite and Shenzhen Component both fell more than 2%. The steep declines seen in China didn’t seem to generate a ripple effect as Japanese shares have risen by more than 1%.
US equity futures have slipped in early trade following a record closing high for the three main indices last week. US Treasury yields declined slightly after 10-year yields approached 1.3%. Meanwhile currencies are moving in tight ranges as the US dollar holds near multi-month highs.
Will the Fed upset equity bulls?
We have learnt a big lesson in the past week. As long as earnings remain robust and the Fed stays accommodative, all negative impact from the pandemic is likely to be short-lived.
Fears over the Delta variant knocked the markets last Monday dragging the S&P 500 and Dow Jones Industrial Average lower by more than 2%. Retail traders were fast to respond, deploying enormous cash amounts to buy the dip and send equities to new record highs by the end of the week. The dips are clearly becoming shorter in magnitude and time given the army of retail traders who are ready to come to the rescue whenever needed. They seem to agree with the phrase “Don’t fight the Fed.”
While the FOMC surprised investors in the last meeting by raising interest rate projections, Jerome Powell advised traders not to read much into the dot plot as it does not represent an official view and should be taken with a “big grain of salt.” The focus instead would be on clues over the timeline for slowing asset purchases.
With inflation surging and unemployment declining, the discussion over tapering bond purchases is likely to heat up. However, at the most recent Congressional hearing on July 14, Powell said that the threshold for tapering was still “a ways off”. Given the spread of new variants of Covid-19 and the threat it brings to the economic recovery, Powell is now in a stronger position to potentially push back against tightening policy. Expect any announcement related to tapering asset purchases to be delayed until later this year which should provide further support to the current equity bull market.
Mega Tech earnings week
With US stocks indices at record highs, it would seem they need another dose of encouraging news to make another significant move upwards. Tesla, Apple, Microsoft, Facebook and Amazon are all due to announce earnings this week. Considering these combined companies represent more than 20% of the S&P 500 market cap, they will definitely determine the path of markets in the next few days.
So far, 88% of S&P 500 companies managed to beat EPS estimates and 86% surprised on revenues. This theme is likely to continue when the Big Tech firms announce results this week, but a simple beat won’t be enough. The magnitude of this and earnings guidance are the factors that will determine the direction of their stocks.