Stock Market Today
US and European futures are recovering some of their losses while traders are carefully placing their bids and assessing the actual risk of recession. Traders will focus on US earnings as JP Morgan and Morgan Stanley will kick start the bank earnings today. It is widely anticipated that higher volatility in the market in the past quarter should have helped the banks to post more strong numbers in their trading unit. The fees in the investment banking section may have declined as there wasn’t enough action because easy money has left the town. Wells Fargo and Citi bank will post their numbers tomorrow, while Goldman Sachs and Bank of America will announce their results next week.
The Big Theme
After the eye-popping US inflation reading, which blew past all expectations, everything is in play for the Fed, which means even an interest rate hike of 100 basis points. Yesterday, the US inflation reading came in at 9.1%, the highest number in over 41 years. Traders have been expecting for a while now that they will see a peak in the US inflation data, but there seems to be a bit more pain left. Although many do believe that yesterday’s US inflation reading may have marked a peak in inflation reading and from here onwards, the path of the least resistance is more likely to be consolidation with a minor tilt to the downside. This means that inflation readings aren’t expected to go near the Fed’s current target, or inflation numbers will take a lot of pain and time to come down.
Not everything is pessimistic regarding inflation reading, and this is because we saw a rally in the US stock market. The current optimism is that oil prices have decreased from their highest level. For instance, both Crude and Brent oil are trading below the $100 mark, and lower oil prices should help inflation readings as higher oil prices were fanning higher inflation.
The most important aspect from here onwards for investors and traders is to differentiate between the reality and noise in the market. There is no doubt that from now on, we will most likely hear immensely hawkish comments from several Fed members. For instance, Atlanta’s Chief Raphael Bostic and Cleveland’s Loretta Mester have already started to say that nothing should be discounted.
We think that when it comes to the Fed’s monetary policy, the likely scenario under the current circumstances is an interest rate of 75 basis points in the coming few meetings. We think it is unlikely that the Fed will increase the interest rate by 100 basis points in any of the meetings as that would cause too much pain.
The EUR/USD officially reached parity yesterday, thanks to the dollar, which gained enormous strength on the back of the US CPI reading. There is no doubt that the Euro is highly oversold on the daily and time frame, which means we are likely to see a lot of bargain hunters coming into the market to make a few quick dollars. As for the long-term outlook, the gap between the EU and Fed’s monetary policy is immensely mammoth. In other words, it is more likely for the ECB to front-load its interest rate, and there are far more chances for the ECB to increase the interest rate by 100 basis points or even more to catch up with the rest of the central banks.
The EC has already trimmed the outlook for the Eurozone for this year. The new outlook for the GDP for the Eurozone is 2.6%, and it blamed higher inflation for the slowdown in the GDP. The EC believes that the Eurozone’s GDP will grow by 1.4% in 2023, which is significantly lower than their previous number of 2.3%.
Stocks In Demand
Netflix stock price may see a relief rally today as the company announced Microsoft as its advertisement sales partner for its new ad-based streaming services. Now, the focus will not only be on its subscribers but also on how much revenue it is pulling, which could be far greater than its subscriber. The reality is that Amazon’s with-adds movie experience is doing well as they are spaced apart and producing very little to no adverse user experience.
Tesla’s stock could experience higher volatility as a key player, the architect of its Autopilot system, has decided to leave. Autopilot could become the company’s new revenue-generating business, and traders will not like that key players have started to abandon ship.