Concerns about the economic outlook acted as a cloud over European markets yesterday as we saw a second successive daily decline, with profit taking in luxury and weakness in defensives acting as a wider drag.
Basic resources which had been a weak point in the early part of the week saw a modest rebound but a sharp slide in oil prices below OPEC+ production cut announcement levels at the beginning of the month spoke to a wider concern that demand could well slide further over the coming months.
US markets underwent a broadly negative session as well on concerns that uncertainty in the regional banking sector might spread, as well as tightening lending conditions, and ergo slow the US economy.
There are also some concerns that the loss of confidence in the future of First Republic Bank could prove contagious, although a sharp rebound in PacWest Bancorp’s shares on an improvement in its deposit base suggests that any fallout might be contained.
Nonetheless while the Dow and S&P500 finished lower the Nasdaq 100 got a boost from Microsoft which helped to drag the index into the green. Tech seems to be acting as somewhat of a haven trade with Facebook owner Meta Platforms set to offer a further boost after reporting better than expected Q1 revenues and profits as well as an upgrade to Q2 guidance.
Q1 revenues came in at $28.1bn, a rise of 3% and easily beating expectations of $26.76bn, while profits came in at $2.20c a share, or $5.71bn, a fall of 24% but also above expectations. Costs and expenses rose by 10% to $21.4bn. The improvement in revenues appears to be as a result of an improvement in revenue per user.
On the more positive side Q2 revenue guidance was adjusted higher to between $29.5bn to $32bn, while full year operating expenses are now expected to come in between $86-$90bn, a decline of $5bn, and a sum that includes $3bn to $5bn in restructuring costs. The Reality Labs segment or Metaverse continued to bleed cash, losing just shy of $4bn as revenues fell to $339m.
While tech earnings continue to beat expectations, the broader market has continued to underperform, and today’s European open looks set to be a negative one with today’s focus shifting to Amazon’s numbers after the bell and the US Q1 GDP numbers.
Having seen the US consumer recover strongly in January with a retail sales surge of 3.2%, the edge has come off a little in recent months as consumer spending slowed in February and March, by -0.2% and -1% respectively.
The instability caused by the banking turmoil will also have affected economic output at the end of the quarter, although we probably won’t know the full extent of that until we get later revisions during May.
The strong labour market and resilience in wage growth seen in the first part of the quarter are likely to offer a strong personal consumption component.
Expectations are for the US economy to slow slightly from 2.6% in Q4 to 2%, while personal consumption is expected to rebound strongly from the 1% seen in Q4.
Weekly jobless claims are expected to come in at 248k, up slightly from 245k, with continuing claims set to post another 52 week high of 1,868k.
EUR/USD – made a fresh one year high of 1.1095 yesterday before slipping back. A move through 1.1120 is needed to signal further gains. Below 1.0940 retargets the 1.0870 level.
GBP/USD – popped up to 1.2516 before slipping back again. Support remains at the 1.2340 area. This needs to hold to keep the bias for a move towards 1.2630 intact, or risk a move towards 1.2270.
EUR/GBP – failed at the 0.8875 area for the second day in a row, slipping back towards the 0.8830/40 area. Below 0.8820 targets trend line support from the August lows at 0.8770. A break above the 0.8870 area suggests a retest the March peaks of 0.8925.
USD/JPY – remains under pressure, slipping to the 133.00 area yesterday. While below the recent peaks at 135.20 bias remains for a move towards 132.00. Above 135.20 retargets the 200-day SMA at 137.00.
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