Fed and earnings bring cautious optimism

A quiet start to what will otherwise be a lively week in financial markets with particular focus on the US as the Fed meets Wednesday and big tech report earnings.

Stock markets are modestly in the green, with a fair amount of straw clutching at play once more. Earnings not being as bad as feared, the Fed only hiking by 75 basis points and China putting together a plan in the hope of averting the next wave of the property crisis is among the reasons being given for stock markets rising. It all seems a bit desperate.

Don’t get me wrong, we need to take the small wins but none of the above scream recovery to me. Stock markets can’t fall forever but the latest bear-market rally seems to be being driven by as much finger crossing as the previous ones. I think there may be a few more nasty surprises that will test the foundations of the latest market bottom.

Those foundations could be rocked over the next few days if things don’t go to plan. I expect the Fed will not hit the panic button yet and hike by 75 basis points again which still represents a very aggressive tightening path this year. But they may signal that another is possible in September, with markets currently having that as a coin toss.

Whether that will be enough to send equity markets into another spiral I’m not sure. It could certainly dampen sentiment, to what extent may depend on what Microsoft, Alphabet and Meta have to say, among others. I’m not sure sentiment can take the combination of disappointing earnings and a more aggressive Fed.

So we should all enjoy what is shaping up to be a relatively calm start to the week. The next few days are going to be full on and by the end of the week, we could have a better idea of whether the US is heading for recession, as appears to be the case here in Europe.

Make or break moment?

I can understand why some may be getting excited by the price action we’re seeing in bitcoin over the last couple of weeks. It’s come from trading below USD20,000 to hit a six-week high and now the pullback of recent days has been very mild. That in the short term is arguably a bullish signal but it’s still too early to say whether it will have legs. And as is the case with other assets, the Fed could make or break the recovery.

For a look at all of today’s economic events, check out our economic calendar: www.marketpulse.com/economic-events/

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Craig Erlam

Craig Erlam

Former Senior Market Analyst, UK & EMEA at OANDA
Based in London, Craig Erlam joined OANDA in 2015 as a market analyst. With many years of experience as a financial market analyst and trader, he focuses on both fundamental and technical analysis while producing macroeconomic commentary. His views have been published in the Financial Times, Reuters, The Telegraph and the International Business Times, and he also appears as a regular guest commentator on the BBC, Bloomberg TV, FOX Business and SKY News. Craig holds a full membership to the Society of Technical Analysts and is recognised as a Certified Financial Technician by the International Federation of Technical Analysts.