Earnings season has turned out better than expected, especially for the tech and banking giants holding up the NASDAQ and S&P 500. However, there are signs that monetary policy may remain tighter than markets broadly expect, with the Australia’s central bank surprising with an unexpected hike with suggestions that more may be on the way. With inflation remaining sticky, expect some hawkish tones from central banks globally. Movement in crypto continues to be muted, in the absence of major catalysts.
Overall, equity has done well in the past week. Broader indices have held up well, with both major tech companies and banks reporting good numbers. However, indices have moved largely sideways since 31 Mar, even as megacaps Meta (META) and Nvidia (NVDA) reach their 52-week highs. Given the broader market, there is concern that tech trades are too crowded and that despite relatively good earnings, the valuations are still far too aggressive, and the effects of recession have yet to make themselves fully felt. Amazon’s post-market movement on earnings is especially indicative of both the greed and fear that is pervasive in tech stocks right now.
In contrast, First Republic’s acquisition barely moved broader markets, suggesting the outcome was largely as expected and that the markets do not expect any further developments along this front.
The markets have priced in a 25 bp raise after the next FOMC meeting, up from a 50/50 between flat and 25 bp a month ago as banking concerns subsided and inflationary pressure look to stay barring a serious recession. Expect some additional hawkishness from global central banks this week as they highlight their central mandate is price stability. For the past few meetings, markets have growing less concerned, with expected volatility decreasing over time. There are good odds this may change going forward as policy maker decisions become less certain.
On the front of the US debt ceiling, Yellen has warned that the Treasury may run out of cash as soon as June 1, forcing the US into a technical default. The odds of this happening is slim, but events where all parties are averse to may still occur if there is a misstep. Ultimately, the most likely outcome is one US party largely strong-arming the other into an agreement right before the X-date.
Upcoming Calendar Events
- FOMC Meeting (2 – 3 May)
- ECB Interest Rate Decision (4 May)
- US labour data (5 May)
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