Earnings season begins in earnest this week as investors look for an exit from the market’s recent malaise as jobs data suggests recession fears may be overplayed.
U.S. equity moved lower Monday, while the dollar scaled fresh two-decades highs against its global peers, as investors took a broadly defensive tone heading into what could be a crucial week in terms of direction for global stocks markets.
Earnings, inflation and retail sales data will likely establish a longer-term tenor for U.S. markets this week as investors debate underlying strength of the world’s largest economy, which appears to be tilting towards recession, and the Federal Reserve’s appetite for higher interest rates against surging inflation.
Corporate earnings, in fact, could be the pivot point from which investors launch a sustained stock market rally between now and the end of the year, with investors closely eyeing the start of the second quarter reporting season later this week.
JPMorgan Chase (JPM) – Get JP Morgan Chase & Co. Report, Citigroup (C) – Get Citigroup Inc. Report, Wells Fargo (WFC) – Get Wells Fargo & Company Report and Morgan Stanley (MS) – Get Morgan Stanley Report will lead the way with June quarter profit updates, following on from their solid Fed stress test results last month, as around 18 S&P 500 companies are slated to update this week.
Collective S&P 500 profits are forecast to rise by 5.7% from last year to a share-weighted $465.3 billion, although the bulk of those gains will be derived from soaring energy sector profits. Once those are backed out, S&P 500 earnings will likely be 3% lower from last year.
Last week’s stronger-than-expected June jobs report, which showed 372,000 new additions alongside moderating wage growth, went a long way in terms of dispelling concerns over a near-term recession, but growth metrics continue to suggest contraction over the second quarter and sustained weakness as we enter the third.
Modest gains for equities last week, however, indicate investors need further convincing before they’re prepared to embrace a growth-lead rally for stocks over the second half of the year, particularly given the pace of inflation and the Fed’s continued pledge on interest rates derived from minutes of is June meeting, which were published last week.
The CME Group’s FedWatch tool is pricing in a 93% chance of a 75 basis point rate hike from the Fed later this month, with a 30% chance of a similar move in September, up from just 14% a week ago.
The U.S. Treasury bond yield curve remains firmly inverted, as well, with 2-year notes trading at 3.088% and 10-year note holding at 3.071% ahead of a $33 billion auction of new paper later this week. The U.S. dollar index, which tracks the greenback against a basket of its global peers, was marked 0.65% higher at 107.695.
Europe’s Stoxx 600 was marked 0.27% lower in mid-day Frankfurt trading, following on from a 1.65% decline for the Asia-region MSCI ex-Japan index and a 1.11% gain for the Nikkei 225 in Tokyo.
China stocks, in fact, were hit by reports of new Covid infections, as well as mass testing, in Shanghai, amid the possible spread of the new, highly transmissible Omicron subvariant.
The news, as well as the firmer U.S. dollar, pushed global oil prices shaprly lower in overnight trading, with WTI futures contracts of August delivery falling $2.32 to $102.47 per barrel and Brent contracts for September sliding $1.68 to $105.34 per barrel,
On Wall Street, futures tied to the S&P 500 are indicating a 30 point opening bell pullback while those liked to the Dow Jones Industrial Average are priced for a 191 point slide. Futures linked to the tech-focused Nasdaq are indicating a 115 point decline.
In terms of individual stocks, Twitter (TWTR) – Get Twitter Inc. Report shares extended declines in pre-market trading following Tesla (TSLA) – Get Tesla Inc. Report CEO Elon Musk’s declaration that he’s ‘terminating’ his $44 billion merger agreement and the social media group’s vow to make him go through with the deal.