Week Ahead: 12 April 2021

After what has been a low key and holiday-shortened week for the markets, things should pick up in the weeks ahead. As well as a busier economic calendar, US corporate reporting season will kick into a higher gear with the release of big bank earnings. We may well see some volatility after the S&P 500 hit repeated new all-time highs on falling volumes. The key question going into the earnings season is this: Will company CEOs mirror investors’ optimism on economic outlook, or will they provide more subdued forecasts? And what about the US dollar? After ending the first quarter on the front-foot, the start of Q2 has seen the dollar weaken against most major currencies. The underlying bullish trend could resume for the buck, especially against currencies where the central bank is comparatively more dovish than the Federal Reserve, or regions where the vaccinations have been slower than in the US.
 
Until now, investors have been quite happy to be buying any dips in equity markets amid growth optimism and despite rising inflationary pressures and valuation concerns. Covid vaccinations continue at a very good pace in the US and UK, while the eurozone is lagging behind but some reports suggest authorities there are going to ramp up their efforts - which is why the euro has shot up this week.

Taper talks could resurface

One source of concern that has not materialised yet but may come back to haunt investors in the near future is the potential for inflation to overshoot as a stimulus-fuelled economy recovers from the pandemic. So far, investors seem to think that the Fed will see through any short-term price pressures as there is plenty of spare capacity left in the economy. After all, stronger economic growth should boost earnings and revenues of US companies. So, “why sell?” is what some investors would be thinking.

At some point, sky-high valuations will come back to the forefront, especially when the Fed plans to slowly withdraw stimulus. This could happen for example if inflation turns out to be longer lasting rather than a temporary shock. But policy makers at the Fed don’t think that is going to the case any time soon. They have suggested there are no imminent changes to be expected in monetary policy, according to the FOMC’s last meeting minutes. They think it will likely be "some time" until substantial further progress is made towards the maximum-employment and price-stability goals.

Inflation data eyed

This means that for now, the stimulus programme of buying assets worth $120 billion per month will continue. However, with the March employment report surprising to the upside, combined with signs of rising inflationary pressures, and not to mention the faster pace of vaccinations and fiscal support, the Fed may want to ease off the gas sooner than expected as the economy potentially heats up faster. They wouldn’t want to overcook inflation and then apply the brakes harshly. So, watch out for a change of tone from Jay Powell and co. in the coming weeks, especially if we now start to see an acceleration in inflation data. Tuesday’s release of CPI is thus going to be important for the dollar and the markets in general, as too will the speeches scheduled from various FOMC members (see below).

So, I reckon that volatility will spike sooner or later as growth optimism is replaced by inflationary concerns and taper tantrums. All it takes is a few people to start selling to get the ball rolling. With all the above macro concerns and talks about corporate tax hikes to pay for the cost of stimulus, things could unravel on Wall Street soon. Keep a close eye on the major indices -- and indeed individual names with the reporting season officially underway now.
 
Key economic data and company earnings highlights
 
Big Wall Street banks are set to report earnings next week, with JPMorgan, Wells Fargo and Goldman Sachs all due on Wednesday. On a macro level, Tuesday’s inflation data from the US is undoubtedly going to be important as it could impact bond yields, the dollar and obviously gold. Oh, and there is going to be an IPO as the largest US cryptocurrency exchange, Coinbase, goes public.
 
Tuesday
 

 
Wednesday
 

 
Thursday
 

 
Friday
 

 
Coinbase IPO

The largest US cryptocurrency exchange is set to go public on Wednesday 14^th April. Its shares will be listed on the Nasdaq Exchange and the company will trade under COIN stock ticker. The price range is still unknown. The company is planning a direct listing of its stock, meaning there won’t be a middleman (usually an investment bank such as Goldman Sachs) involved. In effect, the direct listing means the current stakeholders will be able to sell their shares to new investors.

Now Coinbase generates its revenue, among other things, from charging fees when investors and speculators buy and sell Bitcoin and other cryptocurrencies. With demand for cryptos soaring, Coinbase revenues and profit could increase further in the future – especially during times of heightened volatility in the crypto space. The IPO will allow investors to gain indirect exposure to cryptos without actually owning any digital currencies and worrying about the day-to-day volatility of cryptos.
 
S&P 500 rally near exhaustion?
 
The S&P 500 is testing the upper resistance of the rising wedge pattern currently. Given the strong bullish momentum, a continuation higher cannot be ruled out. But what I am interested in seeing is whether the breakout will fail, and we go back below the trend line. If that happens, we could see a sharp drop to at least the support trend line of the wedge pattern in the days ahead. It is worth pointing out that Relative Strength Index (RSI) indicator is at overbought levels of around 70. Keep an eye on the S&P 500 as the earnings season kicks into a higher gear and as taper talks potentially come to the forefront in the weeks ahead.


Source: ThinkMarkets and TradingView.com