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Market Update : Bad news is good news?

A retrospective of last week's events.

Financial markets Source: Bloomberg

Last week was filled with seemingly bad news in the markets:

  • Several big Tech companies missed earnings estimates.
  • US GDP fell 0.9% and entered a second consecutive quarter of decline, which is the definition of a recession.
  • The FED announced a 75 basis point rate hike.

Subsequently, the S&P 500 managed to gain over 3% last week and continue its rally from the June bottom, gaining over 10% since.

SP500 Source: Stockcharts, Seeking Alpha

We will try to explain in this article how this seemingly bad news made the market go up.

Earning growth has slowed… but less than feared

Last week was massive in terms of earnings releases. We'll take a look at the largest caps and their impact on the market:

  • Big Tech's earnings growth declined compared to Q1 2022.
  • While most Big Tech missed analyst estimates, the market hailed the fact that their performance “could have been worse".
  • This triggered a wave of optimism on the market that has fueled last week rally.

The chart below shows this contradiction: last week saw a strong rally in technology stocks despite slowing earnings growth.

Earnings season Source : IG Bank

Will the FED change its stance?

The second factor that pushed the markets higher last week was more related to the macroeconomy:

  • The FED's 75 basis point hike relieved markets that were concerned about a 1% hike.
  • At the same time, the US GDP contraction raised hopes for a more dovish attitude from the FED.
  • The following sentence from Jerome Powell was taken as a potential hint towards a more flexible monetary policy in the future:

“As the stance of monetary policy tightens further, it likely will become appropriate to slow the pace of increases while we assess how our cumulative policy adjustments are affecting the economy and inflation”

How has the market reacted to these news?

If we consider the CME FED Fund Futures curve, we can draw an interesting observation:

  • In blue, the current FED guidelines forecast a 3.40% rate at the end of the year and 3.80% at the end of 2023.
  • In green: the FED Fund Futures curve shows that the market is pricing a rate cut in March 2023.

This means that the market anticipates a more dovish future monetary policy than the FED has communicated.

FED Source: Bloomberg, Seeking Alpha

Conclusion

After last week's wave of optimism, the San Francisco and Chicago Fed presidents warned yesterday that the tightening cycle is not over to temper market enthusiasm.

While geopolitical events could also weigh on the balance, macroeconomic data should be one of the main drivers of the market in the coming weeks.

The next key events will be the Jackson Hole Symposium on August 25-27 and the FOMC meeting on September 21.


The information on this page does not contain a record of our trading prices, or an offer of, or solicitation for, a transaction in any financial instrument. IG Bank S.A. accepts no responsibility for any use that may be made of these comments and for any consequences that result. No representation or warranty is given as to the accuracy or completeness of this information. Consequently any person acting on it does so entirely at their own risk. Any research provided does not have regard to the specific investment objectives, financial situation and needs of any specific person who may receive it and as such is considered to be a marketing communication. Although we are not specifically constrained from dealing ahead of our recommendations we do not seek to take advantage of them before they are provided to our clients. See full non-independent research disclaimer.

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