Fed supports "buy everything" mantra': US earnings now to test the bull market

Market sentiment: still “buy everything”

Wall Street equities ended the week with the wind at their back, registering fresh record highs, while other global stock markets remain around year-to-date highs. Ultimately, the financial markets belong to the bulls, as the “buy everything mantra” that has encompassed several weeks of trade remains prevalent. Risk appetite was juiced last week by two-days of testimony from US Fed Chair Jerome Powell, in which the Fed-head all-but-confirmed the Fed would be cutting interest rates at its July 31^st meeting. That’s bolstered hope that fresh-liquidity is set to flow through the financial system to pump up asset prices across the globe.

Risks to the outlook remain present

But the bulls control on price action must be considered tenuous. It’s because the essential contradiction remains: yes, easy money is likely to be injected into markets, however fundamentals still appear to be deteriorating. Market participants now confront US earnings season, out of which analysts are expecting earnings growth on a year-on-year basis to contract by -2.7%. The winding down of the global economic slowdown, which has certainly been exacerbated by the pernicious affects of a global deterioration in international trade-relations, is becoming apparent in corporate profits. The central concern for markets, therefore, remains the opposing forces of fresh-liquidity, versus diminishing profitability.

Global equities stay strong

Nevertheless, on the week, global stocks performed well. US indices are at all-time highs, with the S&P 500 on Friday breaking through the psychological barrier of 3000, and the Dow Jones extending its climb above 27,000. Price action in other major indices was more subdued it must be said. But for now, the upward trend remains. The ASX 200, experienced slightly more sluggish trading conditions, closing the week’s trade below the 6700-mark – though remains in what can only be described as an upward trend. A climb in Australian Government bond yields and the Australian Dollar were the biggest culprits behind this dynamic.

Rates markets dealing with mixed information

On global bond and interest rate markets, price action in that asset class was slightly more complex. The reasoning centres around the circumstances, naturally, in the US economy. Yields are being suppressed somewhat by the pricing in of imminent interest rate cuts from the US Federal Reserve. However, the enthusiasm related to that fact was tempered last week, after US CPI data printed stronger than expected, and forced trader’s to rethink the capacity central banks will have to cut as hard as markets would like. The overall result was a steepening of the yield curve, which incidentally, proved positive for financial stocks last week.

FX markets revolve around weaker Dollar

The powerful words of US Fed Chair Jerome Powell ultimately held the greatest weight of all, and that brought about weakness in US Dollar last week. That was undoubtedly beneficial for US equities, and supported their rally on Friday. It also managed to place a little support under commodity prices, which manifested in commodity-currencies. The Australian Dollar rallied, edging towards month-to-date highs. The Yen remains in vogue amidst anxiety about the global economic outlook, trading into the 107-handle again. The Euro also edged higher, solely because of the weaker Greenback; and the Pound is into the 1.25-handle, but remains in a downtrend amidst soft UK fundamentals.

Commodities tell a few stories

The combination of a lower USD, and a renewed swelling in the pool of negative yielding debt in global financial markets prompted a rally in Gold prices again last week – with the price of the yellow metal looking increasingly comfortable above $US1400. Oil prices climbed, owing to a bigger than expected drawdown in US Crude Oil inventories last week, tensions between Iran and the West, and a storm ripping through the Gulf of Mexico. While industrial metals climbed, continuing it’s post G20 meeting bounce, although, it must be said, seem to be trading with a long-term trend to the downside.

This week contains plenty to nibble on

The week ahead now arguably has something for everyone: corporate earnings, economic data, and central bank news. The US financial sector kick-off Wall Street’s reporting season in earnest; China’s monthly data-dump comes out today and a swathe of Retail Sales, labour market and CPI data is printed across the globe throughout the week; and the RBA’s Minutes come out Tuesday and US Fed Chair Jerome Powell addresses the market in the middle of the week. The balance between corporate fundamentals, global economics, and financial conditions is as precarious as ever; and markets will be searching for reasons to let the good times roll.