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MARKETSU.S. stocks traded cautiously on Monday as the holiday-shortened week began, with investors hesitating to increase their risk exposure ahead of critical inflation data. Although all three major U.S. indices recovered from their intraday lows, the overall sentiment remained subdued. After a strong performance last week, investors may be taking a hiatus and possibly enjoying the spring break, while others are adopting a wait-and-see approach for the next bullish catalyst, such as a favourable outcome from the Fed’s preferred inflation gauge. In this context, an “all-clear” signal would entail the inflation data meeting consensus expectations or coming in lower than anticipated.As we enter the earnings season window, investors are eager to divert attention from the familiar inflation narrative dominating the markets. During this period, the default setting typically revolves around whether or not companies will deliver robust earnings growth to justify the S&P 500’s valuation, which currently stands at a lofty 21 times earnings. Hence, investors typically move into wait-watch mode as they get influenced by the bombardment of bears.The recent market rally, particularly in equities, has been driven by elevated expectations, with global shares climbing around 25% from their recent lows over the past five months. However, skeptics on Wall Street argue that these heightened expectations demand a significant boost in earnings to justify current valuations.Certainly, the lofty market valuations imply that there is little margin for error, both in terms of corporate earnings performance and policy decisions. However, the prevailing expectation is for eventual rate cuts rather than hikes, which could provide some support to current valuations.Still, the end game remains consistent each quarter, especially for mega-cap companies(that drive the index), with only a few turbulent reports in 2022. Generally, these corporate behemoths consistently meet or exceed expectations with their financial numbers. They have become integral to the daily lives of consumers and business people worldwide, representing a significant portion of everyday existence. While occasional dips in performance may occur, very few quarters can be objectively classified as poor. The perception of a “bad” quarter often hinges on relative or subjective measures rather than absolute balance sheet shortcomings.However, this has been one of the oddest stock market rallies, and we’ve certainly had to add another chapter to the modern-day stock market operator playbook. Unlike last year’s rally, driven by lower yields and the prospect of 7 Fed cuts, Bond yields have surged notably as investors capitalized on gains from longer-term bonds. At the same time, the Fed dialled back on several of the rate cuts that had been anticipated for this year. Conversely, aggregate growth data has shown weakness, suggesting a case for lower rates. This sets the stage for a tug-of-war between weaker growth expectations and higher-than-expected inflation.
FOREX MARKETSIntervention by the typical state-owned consortiums to bolster the Yuan, coupled with strong verbal backing for the yen from Japanese officials, has contributed to limiting the dollar’s rise overnight. However, it isn’t easy to find traders who genuinely believe that the Ministry of Finance will intervene at 152 yen. Regarding the Yuan, it remains uncertain whether yesterday’s action by the PBoC was aimed at smoothing the currency or if Chinese authorities will allow a period of Renminbi depreciation in the short term.
OIL MARKETSThe increase in oil prices was driven by escalating geopolitical tensions, with a particular focus on sabre-rattling from the Houthi faction. Mohammed Ali al-Houthi, a member of the Houthi Supreme Political Council, issued a warning on Sunday, stating that Saudi Arabia or any other nation allied with the United States or the United Kingdom could be considered a “legitimate target.” This rhetoric contributed to market concerns and consequently boosted oil prices.More By This Author:PCE Week: But The Narrative Feels All Too Familiar
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