Blistering earnings and Korean optimism
Friday’s cautious stock market start is founded on more positive reasons than the day before. A solid set of earnings including two blistering quarterly reports from U.S. technology giants overnight have gone a long way to reset the week’s listless tone. Geopolitics help. The outcome of the first joint summit for over a decade between both sides of the Korean peninsula is uncertain, though the timing is opportune for markets, keeping the KOSPI in the black and helping limit the region’s stock market losses for the week, with all key contributors to the MSCI Asia Pacific Index in the black, led by the Hang Seng and the Nikkei. Japan absorbed the negative implications from the BoJ removing a timeframe for its inflation target, although the move could be read as both implied easing or tightening. The yen nevertheless played ball, with the dollar hovering just slightly higher against the currency at the time of writing.
Technology does the heavy lifting
In fact, few of the week’s most spotlighted risk factors – particularly the yield and dollar rally have changed much over the last 24 hours, so the uplift to sentiment has been driven almost entirely by equities, particularly following corporate earnings. The U.S. (and U.S.-listed) technology sector remains the driver, with futures on the Nasdaq again the only contract in the black ahead of the start of cash trade. That reflects impressive quarterly reports overnight by Microsoft, which notched its eleventh straight 90%-plus revenue rise in cloud services and Amazon and Baidu, both of which stunningly broke their profit moulds. Momentum carried Facebook stock almost 10% higher in the wake of its surprisingly robust revenues and profits a night before.
Still, whilst the closely watched 10-year Treasury Yield has retreated somewhat from the symbolic 3%, abetting improved interest in the risky assets, at 2.974%, it clearly hasn’t moved far. Whilst in range of another attempt in the near term, nerves may remain elevated even if earnings continue to reassure. Three-month dollar highs also remain largely intact. Though in the case of the euro, Draghi's measured commentary about growth on Thursday also acknowledged “some moderation” relative to exceptional conditions last year and earlier in 2018. That oiled the euro’s descent by as much as 110 pips from Thursday’s high. This continues to embolden buyers of European shares even if earnings on this side of the Atlantic have fewer flashes of the spectacular. As in the case of RBS, investors are requiring a higher standard of corroboration that solid earnings can be sustained. In the UK lender’s case, strong outperformance of the market’s profit expectations was eclipsed by signs that rivals are getting the better of it in business banking, whilst the wait for a settlement in its multibillion dollar case with the department of justice is keeping investors wary.
U.S., UK GDP in focus
Weak UK GDP at least had the benefit of capping the pound and in turn opening the door for the FTSE to creep higher, with market-implied chances of a May rate hike falling further. However, blue-chips dependent on the British economy, again see RBS and Lloyds for large examples, can be expected to see further drag. U.S. Advance GDP remains the most important entry remaining on the economic agenda. Economists have penciled-in a sizeable fall in the first quarter to 2% compared with 2.9% at the end of last year. The scope for growth to inch higher than the most pessimistic expectations again trains focus on the dollar and Treasury yields. If the headline figure is better than feared, stock markets should brace for further turbulence.
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