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Microsoft hits a home run, as investors look to the Fed and Apple earnings

Jerome Powell

Markets in Europe look set to continue to be driven by the prospect of further restrictions being imposed by governments concerned about seeing further increases in coronavirus cases. There's speculation about a third lockdown in France, which could come by the weekend, and the prospect of further restrictions here in the UK in the form of quarantining all returning British citizens into the UK, before being allowed back into the general population.

European markets enjoyed a welcome respite yesterday after three successive daily declines, rebounding after the IMF adjusted its 2021 GDP forecast upwards, though the pill was somewhat soured by the fact that they downgraded the EU’s GDP outlook by a full percentage point, to 4.2%. The damage was more than offset by an upgrade to the US outlook from 3.1% to 5.1%, however in contrast US markets finished the session slightly lower, no doubt driven by a little caution ahead of today’s Federal Reserve meeting, as well as a host of important big tech earnings announcements, the first of which came from Microsoft after the bell.

With Apple and Facebook to come later today, Microsoft appears to have set the right tone by blowing through expectations for Q2, boasting a 17% rise in annualised revenue, driven by its Intelligent cloud business which saw a rise in revenues of 23% year-on-year. This outperformance saw quarterly sales rise above $40bn for the first time ever, to $43bn, while profit came in at $15.5bn, a rise of 33% Microsoft’s web services product Azure, which competes with Amazon’s AWS, saw a particularly impressive performance with a 50% increase in sales. Personal computing also performed well, helped by the move to home working, as well as a new Xbox X product which saw sales of $15.1bn, sending Microsoft shares sharply higher in after-hours trading.

This stellar performance raises the bar for Apple, as well as Facebook later today, and despite setting the tone for today’s Asia session and lifting the mood there, European markets look set to be much less impressed, with the potential for a slightly negative open here in Europe.

Ahead of the drop of a raft of new earnings announcements, we have the small matter of the latest Federal Reserve policy meeting. The main focus today, apart from the latest tech earnings, is set to be on Washington, and not only because US politicians are trying to agree on a new stimulus plan. It’s also the first Fed rate meeting of 2021, with the main focus likely to be on the tone adopted by the FOMC committee and whether the differences being aired among some on the committee result in a unified message with respect to US monetary policy for the foreseeable future.

Earlier this month Atlanta Fed president Raphael Bostic, who is a voting member this year, broke ranks with the messaging that had calmed markets towards the back end of last year, that US rates were likely to remain near zero until at least 2023, by suggesting that we could well see a taper of the $120bn monthly asset purchase by the second half of this year, and a rate hike before the end of 2022. This was a significant departure from the messaging seen at the last meeting, even though the Fed was slightly more upbeat about the US economic outlook at the time, improving its 2020 GDP forecast to a -2.4% contraction, while upgrading its 2021 forecast to 4.2% from 4%. It was also important to note the FOMC was more optimistic about the unemployment rate as well, forecasting it to fall to 5% by the end of this year, however the next couple of months could have a big part to play in whether that turns out to be in any way accurate.

These more positive outlooks didn’t exactly chime with the near-term outlook at the time, with Jay Powell once again pointing to the need for further fiscal support from Congress, which we got at the end of last year with a $900bn package. This looks like it could well be followed by another $1trn or so by March, slightly below the $1.9trn package US lawmakers are currently negotiating over right now.

At its December meeting, the central bank also committed to keep buying bonds at the rate of at least $120bn a month until substantial progress had been made in respect of the economic recovery. Given Bostic’s remarks earlier this month it will be interesting to note if he has changed his tune on that. This apparent change of tack by Bostic, as well as some slightly less dovish language from other members, helped push US 10-year yields back above 1%, well above where they were when the Fed last met. The comments also helped in steepening up the yield curve, however Fed chief Jay Powell, along with vice chair Richard Clarida, quickly stamped down on these concerns with some soothing words, dragging yields off their peaks. Nonetheless this sharp spike in US yields speaks to wider market concerns about the so-called reflation trade, and the fact that inflation expectations are much higher now than they were a year ago. Fed officials will need to be very wary of creating a situation where markets start to price in a taper tantrum if the US central bank is seen to be preparing the ground for a potential tightening of monetary policy, which markets may start to price in, if US data starts to surprise to the upside.

One thing appears certain, among everything else, is that the relationship between the Federal Reserve, and the US Treasury is likely to be much more harmonious than the last one, with Janet Yellen, Jerome Powell’s predecessor at the helm. That doesn’t look likely at the moment, even accounting for the improvement in the most recent ISM surveys. While the headline numbers have been positive it is notable the employment components haven’t been anywhere near as positive, suggesting the US labour market still needs support. As such we can probably expect Fed chair Jay Powell to reinforce this dovish message, and in so doing help to push US 10-year yields back below 1%, where they were when the Fed last met. If he were to do this while also not being overly negative about the US economy this in turn should be supportive for stocks in general, with no changes in policy expected.

EUR/USD – continues to hold above the 50-day MA, rebounding off it yesterday, with resistance at last week’s peaks at 1.2190. The euro needs to gain a foothold above the 1.2230 area to kick back towards the highs this month at 1.2350. A move below 1.2040 could well signal further losses towards the 1.1980 area, and possibly lower towards 1.1800.  

GBP/USD – the road to 1.4000 remains open after the pound rebounded from the 1.3600 area yesterday. ran out of steam at 1.3725 yesterday falling short of last week’s high at 1.3745. The case for a move towards 1.4000 remains intact while above 1.3450 and the lows from two weeks ago.  

EUR/GBP – the failure at 0.8920 has kept the pressure on the downside with a break of the recent lows at 0.8830 the catalyst for a potential move towards the 0.8780 area. A move back above 0.8920 retargets the 0.8970 area.

USD/JPY – downside risk towards 102.60 remains intact while below downtrend resistance now at 104.30, as well as cloud resistance at 104.70 This area is a key barrier to further gains towards 105.20.

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