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Risk appetite firmer at start of busy week

Fawad Razaqzada Fawad Razaqzada 25/10/2021
Risk appetite firmer at start of busy week Risk appetite firmer at start of busy week
Risk appetite firmer at start of busy week Fawad Razaqzada
 
  • Stocks: European indices and US futures mostly higher
  • Techs in focus ahead of busy earnings week
  • Central banks: ECB and BOJ inaction, BOC likely to taper QE further
European indices traded mostly higher in the first half of today’s session, with US futures also pointing to a firmer open as we start the first day of what will be a busy week for central banks and company earnings.

The dollar has also rebounded after last week’s slight weakness, causing the EUR/USD to turn lower ahead of the ECB’s policy decision later this week. It will be interesting to observe gold and silver prices as the greenback makes a comeback. So far, these precious metals have managed to cling on to the positive territory. But if the USD and/or bond yields were to climb further higher, the metals may struggle.

It is also worth keeping a close eye on some emerging market currencies, especially the Turkish Lira, which has slumped to a fresh low after Turkey’s bizarre policy response to surging inflation with the CBRT cutting interest rates last week.

Crude oil prices, which held near multi-year highs last week, have risen to new highs for the year today on tight supply and stronger demand.

Last week, stocks rose, and most other risk-sensitive assets gained ground. Among other things, sentiment was boosted by mostly better-than-expected earnings and as Evergrande China narrowly avoided default. The S&P 500 and Bitcoin both hit fresh records, with the latter then staging a bit of a pullback on profit-taking, before resuming higher at the start of this week.
 

Looking Ahead

 
Central banks and tech earnings will take centre stage this week, while on the economic data front, there is not much on the agenda until the US GDP data is published on Thursday (see the economic calendar below, for more). Judging by the ongoing risk-on sentiment, we might see some further follow-through in risk-taking in the early parts of this week. Whether the markets will be able to kick on from there will depend, in part, by the outcome of the US technology sector earnings that will be released throughout the week (see below for more).
 

Reflation trade

 
Away from earnings, reflation trade is the dominant theme given the rallying commodity dollars and equities in the face of rising inflation. Investors – judging by their collective actions as reflected in price action on the global markets – reckon that a prolonged period of above-trend inflation, combined with weaker economic growth, is not very likely as the impact of temporary factors and supply bottlenecks are likely to subside in the not-too-distant future.

As such, the markets probably don’t expect central banks to tighten their policies meaningfully anyway – something that the Fed, BoE and others have indicated. This is something that the ECB, BOC and BOJ will all echo as well in the week ahead. Central banks wouldn’t want to choke off economic growth by being too aggressive when they tighten their policies especially as there have been some signs of weakening recovery of late.
 

Techs in focus

 
It is a big week for technology stocks. We will hear from the likes of Alphabet, Apple, Amazon, eBay, Facebook, Microsoft. Heading into arguably the most important week of the earnings season, investors are expecting to see decent numbers from these tech giants. The earnings season has started quite strongly with Wall Street banks producing results that beat expectations previously, while last week saw the likes of Netflix and Tesla shares reach for new highs following upbeat numbers. 

So far, positive earnings have kept the markets supported. However, the key risk is that the global supply chain bottlenecks and surging prices might prove to be a much bigger issue than expected, something which could hurt fourth quarter revenue and profits.

Company CEOs have not been shy discussing these matters abundantly in their earnings calls or reports. Apple, for one, is already expected to slash its projected iPhone 13 production targets for 2021 by a growing number of analysts. The prolonged chip shortage could see Apple miss as many as 10 million units of its flagship iPhone 13, which could ultimately hit its shares. Meanwhile corporates may have been forced to slash their ads campaigns, which could be particularly bad news for social media platforms like Facebook and Twitter and Google.  If Snap Inc is anything to go by then then the fourth quarter results could be weak as companies spend less on ads in the current quarter due to supply issues and other reasons.

So, as well as keeping a close eye on Q3 earnings, watch out for any major warnings about Q4 numbers by major companies reporting this week.  

Nasdaq
Source: ThinkMarkets and TradingView.com
 

Economic data and earnings highlights

 
  • Monday and Tuesday will be dominated by earnings as the macro calendar is quiet.  Facebook earnings will come out after the close today, while on Tuesday we will hear from the likes of Alphabet, Microsoft, Twitter, AMD, Visa, GE, UPS among many others.
 
  • Wednesday will see the release of inflation figures from Australia, followed by BOC’s rate decision where the North American central bank is expected to slash QE by C$1bn from the current C$2bn per week. On the earnings front, we will hear from the likes of eBay, Ford, Boeing, McDonalds, Coca-Cola, GM
 
  • Thursday will see the release of US Advance GDP, while both the Bank of Japan and the European Central Bank will make decisions – likely to be inaction – on monetary policy.  We will also have earnings from Apple, Amazon, Mastercard and Starbucks.
 
  • Friday morning will be dominated by Eurozone data, including German and French GDP estimates; Eurozone CPI and German retail sales, then in the second half of the day we will have US Core PCE Price Index, as well as earnings from Exxon Mobil, Chevron, AbbVie and others.
 
Any opinions, news, research, analyses, prices or other information contained on this website is provided as general market commentary and does not constitute investment advice. ThinkMarkets will not accept liability for any loss or damage including, without limitation, to any loss of profit which may arise directly or indirectly from use of or reliance on such information.

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Any opinions, news, research, analyses, prices or other information contained on this website is provided as general market commentary and does not constitute investment advice. ThinkMarkets will not accept liability for any loss or damage including, without limitation, to any loss of profit which may arise directly or indirectly from use of or reliance on such information.
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