It’s not been a great start to the week for markets in Europe, with little way in the upward momentum after the gains of last week.
Investors appear to be grappling with the diverging risks of a slowing of the global economy, due to rising infection rates, against the risks of rising prices.
US markets also saw declines last night ahead of today’s Fed meeting, with the Nasdaq posting the biggest losses on the back of a little nervousness ahead of three big earnings updates from Apple, Microsoft, and Alphabet, all of which came in well above expectations.
Apple blew away expectations on both counts with $81.41bn in revenues and profits, of $1.30c a share for Q3. iPhone sales came in at $39.57bn, a 50% rise on the same quarter a year ago. Services also beat expectations coming in at $17.48bn, a 33% rise year on year. Mac, iPad revenue also saw a decent increase year on year, while gross margins came in at 43.3%. Concerns about a slowdown in growth due to supply constraints saw the shares come under pressure after hours.
Microsoft also beat expectations, posting a third successive quarter of record revenue, $46.15bn for Q4, well above expectations. Profits were also above expectations, coming in at $2.17c a share. Revenue from Azure rose 51%, helping boost Intelligent Cloud segment revenue to $17.38bn. There was a downside, with sales of Microsoft branded Surface PC’s declining 20%, largely due to supply concerns. Licence revenues from consumer PCs also saw declines due to supply constraints.
Alphabet saw advertising revenue from Google rise 69% from the same period last year.
As we look towards this morning’s European open, last night’s blockbuster tech results, only appear to have offered a modest uplift after yesterday’s declines, while Asia markets have continued to be buffeted by turmoil created by events in China and the regulatory environment there, as we look towards the Fed later today.
It almost seems counterintuitive that the change of narrative from the June Fed meeting, which saw a number of Fed members start to talk in terms of a tapering of asset purchases, as well as a 2022 rate hike, appears to have come just before an increase in concerns about a slowdown in the global recovery story.
The sharp rise in Delta variant cases seen in the last few weeks has fuelled concerns, that for all the optimism over economic reopening, the reality is that coming out of the pandemic is likely to be a much longer road than the market has been originally pricing.
Some of the fears over inflation have already started to subside in the bond markets, whether by accident or design, largely due to cooling commodity prices, as well as concerns that the global recovery may well be weaker than anticipated all the way back in March.
As the FOMC gears up for the Jackson Hole symposium next month, global central bankers are likely to have to weigh up how to balance higher inflation in the short term, against a concern that a possible tightening of monetary policy could well exacerbate worries about a slower pace of economic growth, as infections rates rise across the globe. Yesterday’s update from the IMF warned of the risk that some of the recent rises in prices might be much more persistent than anticipated, as it upgraded its outlook for the US economy.
Today’s meeting is unlikely to change the overall narrative when it comes to the timing of a taper, but it could offer an insight into whether some of the recent hawkishness from the likes of Bullard and Bostic is starting to spread to other members of the FOMC.
The prevailing narrative appears to be one of a greater concern about the employment situation than the big rise in prices that we are currently seeing in some of the latest economic data. New York Fed President John Williams is one member concerned about the lacklustre participation rate, given where it was pre-pandemic at 63.4%. Since the June payrolls report little has changed when it comes to the US economy, with most expectations that the Fed is set to remain on autopilot until Q4 whatever inflation does. It seems unlikely that today’s meeting will change that perception.
EURUSD – the rebound off the 1.1750 lows has held below resistance at 1.1850 for now. A break above 1.1850 potentially targets a move back to the 1.1975 area. A break lower has the potential to target the March lows at 1.1710, with last November’s low at 1.1610 the next key support.
GBPUSD – we got the move to 1.3900, and need to hold above 1.3800, to target further gains towards the 1.4000 level. We still have decent support above the 1.3570 level last week, which was also the February lows.
EURGBP – retesting the previous lows at 0.8510, with a break below 0.8500 retargeting the 0.8480 area, and lower towards 0.8280. Resistance now comes in at the 0.8580 area.
USDJPY – slipped below 110.00 potentially targeting a move towards the 109.00 area and July lows. We need to hold below resistance at 110.30 for this move to unfold.