Monday has started how the last week ended with the dollar extending its corrective bounce and equity markets remaining in consolidation mode. The dollar rebound caused precious metals to drop overnight, before a quick rebound, but the yuan has remained under pressure, with the latter hurt by mixed-bag Chinese data overnight as GDP beat and retail sales disappointed expectations. Meanwhile the pound has eased back with the GBP/USD trading near the key 1.35 handle this morning amid worries about the economic impact of the latest lockdowns. However, the dollar’s comeback is not a game changer and it is far too early to suggest it has formed a major low. Martin Luther King Day means US banks are closed and it will likely be a quiet afternoon with the lack of US data, but things will pick up later in the week with plenty of data and earnings to look forward to.
Last week, global indices closed lower, along with Bitcoin, crude oil, gold, silver and copper. Correspondingly, the dollar index closed higher for the second consecutive week, mainly as a result of a sell-off in the EUR/USD exchange rate and as commodity dollars eased off a tad in a mild risk off tone. Bond yields fell back after rising sharply the week before, reflecting concerns that economic growth is going to remain very soft in Q1 amid rising signs that the lockdowns will not be over as quickly as some had hoped with the recent development of the various COVID-19 vaccines and other treatments. Delays in vaccine distribution in several countries and new variants of the virus in places such as the UK and Brazil have complicated the situation further. On Friday, Pfizer said it was modifying its operations to provide more vaccines this year, but this would negatively impact on vaccine shipments in late January to early February. Vaccines cannot come soon enough as the COVID-related deaths have now reached 2 million worldwide.
Still no end in sight for COVID lockdowns
As investors were reminded that we are far from going back to normal life and with several European countries extending or tightening their restrictions to control the spread of the virus, there was a general risk-off tone in the markets. However, the selling of risk was mild, meaning it is far too early to turn decisively bearish on the markets. Indeed, sentiment could easily turn positive towards stocks and other risk assets in the week ahead despite the COVID situation and virus-related lockdowns, given that we have plenty of data, earnings and central bank meeting coming up.
Central banks have your back
Investors know full well that central banks have got their backs. Jay Powell reminded investors that the Federal Reserve is not going to begin winding down its asset purchases later this year and that it is far from considering an exit from its ultra-loose monetary policies. Similar comments have also been made by a couple of other Fed officials and other global central banks heads of late.
In the week ahead, the same sentiment will undoubtedly be echoed by the head of Bank of Canada, Bank of Japan and European Central Bank. It is thus likely that bond yields will drop further and this in turn could support both the stock markets and non-interest-bearing precious metals.
Also next week, we will have plenty of market-moving economic data, company earnings and a new White House resident, as Joe Biden will become the 46th president of the USA on Wednesday.
Earnings kick into higher gear
As well as a busier economic schedule, the fourth quarter earnings season kicks into a higher gear in the week ahead after US banks unofficially kicked off the earnings season on Friday in a downbeat note as shares of Citi, JP Morgan and Wells Fargo all dropped. Investors will be keen to find out how loan defaults, as a result of the pandemic, have impacted banks’ top and bottom lines, and what the lenders say about the outlook for the rest of the year. There will be a few more banks reporting in the week ahead (see below).
It is a promising sign that many companies in the S&P 500 have revised up their earnings guidance and sales forecasts. Analysts are expecting an average 2.3% earnings growth for S&P 500 companies in Q4, which, if met, would mean a second consecutive quarter of earnings-per-share growth after a +4.1% rise in the third quarter.
While actual earnings will, of course, matter, the stock market is forward-looking. So, outlook for future earnings from company CEOs will be equally, if not more, important than the actual results. There is some uncertainty about a higher tax regime under Biden’s administration, while inflationary concerns are also on the rise amid all the stimulus programmes. However, it is also possible company leaders will provide optimistic forecasts due to pent up demand – especially in the services sector.
So, the upcoming earnings results and guidance could have a larger-than-usual impact on the wider markets this reporting season. Overall, I can’t help but feel companies will want to sound optimistic about the future and that’s exactly what the markets have been pricing in. Therefore, the stock market rally could continue for a while yet, before we see a meaningful correction.
Earnings and data highlights
- Data: German ZEW Economic Sentiment
- Earnings: Netflix, Bank of America and Goldman Sachs
- Data: CPI estimates from UK, Eurozone and Canada; Bank of Canada rate decision and US Presidential Inauguration
- US Earnings: Morgan Stanley, US Bancorp, Sina Group, United health group and P&GUK:
- UK earnings: Burberry and Dixons Carphone
- Data: Aussie employment report, Bank of Japan and European Central Bank policy decisions
- Earnings: Intel and IBM
Keep an eye on Bitcoin
- New Zealand GDP
- Retail sales from Australia, UK and Canada
- Eurozone flash manufacturing and services PMIs
Bitcoin has obviously been looking very impressive of late, but I can’t help to think that a correction is on the horizon. Yes, we have seen the crypto currency lose a quarter of its value last week before bouncing back to maintain its medium term bullish trend. But there is a risk it could fall further. A growing number of people are already talking about $50K next and while it could get there eventually, I just don’t think right now is the time. The extended run means a lot of investors and speculators will be happy to book profit on the first sign of weakness, especially in the current economic climate. But in the longer term, the outlook remains positive as after all, Bitcoin's supply is fixed and there is growing demand for it, which is the true definition of something precious.