Before the Bell: Investors look to the Fed and zoom in on Apple and Facebook
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, from speculation about a third lockdown in France, which could come by the weekend, to 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 per cent.
“The damage was more than offset by an upgrade to the US outlook from 3.1 per cent to 5.1 per cent, however in contrast US markets finished the session slightly lower, no doubt driven by a little caution ahead of today’s Fed meeting, as well as a host of important big tech earnings announcements, the first of which came from Microsoft after the bell,” Michael Hewson, chief market analyst at CMC Markets UK, told Morning Wire earlier this morning.
Apple and Facebook
With Apple and Facebook to come later today, Microsoft appears to have set the right tone blowing through expectations for Q2 boasting a 17 per cent rise in annualised revenues, driven by its Intelligent Cloud business which saw a rise in revenues of 23 per cebt year on year.
This outperformance saw quarterly sales rise above $40bn for the first time ever, to $43bn, while profits came in at $15.5bn, a rise of 33 per cent, Hewson pointed out.
Microsoft’s web services product Azure, which competes with Amazon’s AWS, saw a particularly impressive performance with a 50 per cent increase in sales, he continued.
“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 the shares sharply higher in afterhours trading,” Hewson added.
This “stellar performance raises the bar for Apple,” as well as Facebook later today, and despite setting the tone for today’s Asia session lifting the mood there, European markets look set to be much less impressed with the potential for a slightly negative open here in Europe, he noted.
Federal Reserve policy meeting today
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 Federal Reserve 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 amongst 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,” Hewson explained.
He called this “a significant departur”e from the messaging seen at the last meeting even though the Federal Reserve was slightly more upbeat about the US economic outlook at the time, improving its 2020 GDP forecast to a -2.4 per cent contraction, while upgrading its 2021 forecast to 4.2 per cent from 4 per cent.
“It was also important to note the FOMC was more optimistic about the unemployment rate as well, forecasting it to fall to 5 per cent 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,” Hewson said.
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,” he noted.
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,” Hewson said.
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 ;er cent, 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,” Hewson continued.
“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,” he added.
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, amongst 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,” Hewson continued.
That doesn’t look likely at the moment, he stressed, 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 per cent, 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,” Hewson concluded.