Mixed messages keep US stock gains contained

Financial markets were forced to digest some counterbalancing information last night.

Source: Bloomberg

Powell’s dovishness countered by stronger CPI

Financial markets were forced to digest some counterbalancing information last night. US Fed Chair Jerome Powell wrapped-up his two-day testimony before US Congress, with market participants satisfied that all the “uncertainties”, identified by Chair Powell, confronting the US economy will require a Fed interest rate cut this month. But there was a spanner thrown into the works during overnight trade: US CPI data was released, and revealed consumer prices grew at a much stronger rate than forecast – at around 2.1% year-on-year. The implication here: maybe inflation isn’t subdued enough to give the Fed the scope to cut rates as aggressively as the market expects.

US remain near all-time highs

To be sure: the narrative hasn’t changed, and US equities are still hovering around their all-time highs. The Dow Jones Industrial Average, it will be highly publicized today – Presidential Tweets, and all -- hit 27,000 for the first time in history; while the better benchmark, the S&P 500, is wavering around the key psychological level of 3000 still. However, expectations of rate cuts from the Fed beyond this month were unwound slightly, supporting a big climb in global bond yields overnight. The developments were good for financial stocks, which lead the US market higher last night, but dulled the potential gains in the broader market.

US stocks edge towards overbought levels

On balance, the stock market is still being juiced by two-days of dovish-chat from US Chair Jerome Powell. The lingering question now is with the money taps to be slowly turned on, where can stocks head from here? At-the-moment, momentum in the market still points to the upside, however price patterns and the RSI suggest an emerging pull-back is afoot. Not that this would mark something resembling a correction; more that the weeks of enthusiastic buying of stocks on the basis of easier monetary policy is growing tired. A return to hard fundamentals is likely necessary; which conveniently ought to come as US earnings season heats-up.

US earnings season moves to centre stage

With technicals suggesting rally-fatigue, and valuations looking a little less attractive here, US Q2 reporting season is shaping up as being, on balance, a reasonably negative earnings period, too. Earnings-per-share growth is forecast to fall by -2.7% on annualized basis, as the US, and at that, global economic slowdown begins to crimp US corporate profits. And – perhaps to the chagrin of US President Donald Trump, who clear uses the stock market as a Presidential Key-Performance-Indicator – forecasts suggest it is trade-war sensitive areas of the market, such as materials, energy and I.T stocks, that will be the biggest drags on the overall market.

Markets to focus on forward guidance from US corporates

The bar is set low for this US reporting season, and given corporates’ propensity to under-promise and over deliver during reporting season, positive surprises, in principle, should be easy to achieve for the US market. However, a caveat against this is that there is a prevailing trend, right now, of downgrades to the earnings outlook for US companies, seemingly as the deteriorating economic outlook only gradually plays-out in analyst projections. The forward guidance provided by American companies will therefore take even greater importance this quarter, as investors infer whether the 12% projected growth in earnings-per-share in the 12 months ahead is materially likely.

Investors looking for fundamental justification

Historically speaking, the market looks for roughly 70-75% of companies beating estimates to qualify an earnings season as being “positive”. Any number at or above that mark ought to inspire bullish sentiment in US stocks market; while any number at or below that mark out to either dull sentiment, or turn it relatively bearish. With the US Fed all but certain to set-off on its rate-cutting cycle at the end of this month, and capital, subsequently itching to chase yield in risky assets, investors will be aching for an overall positive earnings season, in order justify putting money to work in equity markets.

Aussie data in the week ahead

There will be more to watch in the week ahead than just the slew of US corporates reporting. The Australian economy, and financial markets, will come into sharp focus – with the RBA’s interest rate outlook the central concern. RBA Minutes will be released Tuesday; and domestic labour market data will be printed on Thursday. As it stands, the markets are assuming the RBA will keep rates on hold, more-or-less, until December this year. For the RBA, the economy’s central problem remains “spare capacity”: both data releases next week will cast light on that subject, and whether current market-pricing for rate cuts is accurate, or not.


This information has been prepared by IG, a trading name of IG Markets Limited. In addition to the disclaimer below, the material 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 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. It has not been prepared in accordance with legal requirements designed to promote the independence of investment research 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 and quarterly summary.

Live prices on most popular markets

  • Forex
  • Shares
  • Indices
Bid
Offer
Updated
Change
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
Bid
Offer
Updated
Change
Bid
Offer
Updated
Change
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-

Prices above are subject to our website terms and agreements. Prices are indicative only. All shares prices are delayed by at least 15 mins.

Plan your trading week

Get the week’s market-moving news sent directly to your inbox every Sunday. The Week Ahead gives you a full calendar of upcoming economic events, as well as commentary from our expert analysts on the key markets to watch.


For more info on how we might use your data, see our privacy notice and access policy and privacy webpage.

You might be interested in…

Find out what charges your trades could incur with our transparent fee structure.

Discover why so many clients choose us, and what makes us a world-leading provider of spread betting and CFDs.

Stay on top of upcoming market-moving events with our customisable economic calendar.

Spread bets and CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 74% of retail investor accounts lose money when trading spread bets and CFDs with this provider. You should consider whether you understand how spread bets and CFDs work, and whether you can afford to take the high risk of losing your money. Spread bets and CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage.