Traders have been ignoring the still-rising Covid-19 cases and have done so again today. A record daily increase of over 230,000 in a 24-hour period were reported over the weekend by the WHO, with the largest increase in virus cases being in the US, Brazil, India and South Africa. Hong Kong is back in full lockdown. The fact that the equity markets continue to remain resilient is very impressive. It is possibly so because we now have better treatments and drugs, and closer to finding a vaccine, which should mean lower levels of mortality. On top of this, ongoing improvement in macro data has sustained hopes over a strong recovery as economies reopen. Large fiscal and monetary stimulus measures have so far done the trick, for both the economy and more so the markets.
But now the
markets face a key test as the second quarter earnings season kicks into a higher gear, with the
big US banks reporting their results this week. Their quarterly results should be very bad as many states were in lockdown in Q2 and many consumers were struggling to pay their loans and make ends meet as delinquencies jumped and unemployment surged by record levels. So, expect to see a big
upsurge in provisions for loan losses, although heightened volatility should mean better trading revenues for banks. Still, we may very well have results the likes of which we haven’t seen since the financial crisis.
However, this should be priced in. What investors will be looking for more than anything is
forward guidance. With interest rates set to remain low for a very long time, and yields depressed due to QE, the outlook doesn’t look too bright, unless we see a sharp economic recovery and a jump in inflation to cause the Fed and other centrals to make U-turns on interest rates and unwind stimulus quickly. Bank CEOs are unlikely to be very optimistic about the economy and therefore future earnings potential, which explains why their share prices have been one of the major underperformers so far this year.
This week will also see the release of earnings from
eBay and
Netflix, as well as some very important
macro data, including from China, Eurozone, UK and US. For more, see our Week Ahead report
HERE.
Ahead of a busy week, US index futures have been rising and point to a higher open on Wall Street later. The S&P 500 CFD chart, below, shows the index has broken another bearish trend line as the bullish advance gathers momentum. The breakout, if sustained, points to a move to at least above the recent range high at 3233, where trapped seller’s stop orders might be resting. Ahead of that level, the index was testing an old support/resistance level of 3214/5, which could break given the bullish price structure beneath it: tight consolidation above the 21-day exponential moving average. However, if support at 3130 breaks first, then this would invalidate the short-term bullish bias. In this potential scenario, a deeper pullback, potentially to 3000, would become likely.
Source: TradingView.com and ThinkMarkets