Markets Drop Ahead of Busy Week of Central Bank & Corporate Updates

The markets have opened the new week lower as traders digest Friday’s US tech selloff and look cautiously ahead to a busy week of central bank and corporate updates. Volumes are expected to be thin as its the summer holidays, but this week promises no shortage of high impacting events. With thin volume and a calendar packed with market moving events, big swings could be on the cards for some markets.

The FAANG Trade No Longer the Guaranteed Return That It Was

The US session at the end of last week left traders digesting 4.1% yoy economic growth in the US in addition to another round of tech stocks reporting.

After Facebook’s disappointing update and record-breaking sell-off, Twitter quickly followed suit. A beat in revenue but a drop off in user activity sent the stock plunging 12% on fears that the platform’s user growth could be limited.

Earnings season had set off to a good start, however, tech stock headlines have quickly dominated, transforming perceptions and raising questions over valuations of FAANG stocks. With Netflix, Facebook and now Twitter disappointing with results, investors are seriously questioning these advertising revenues based or subscription-based models. On the other hand, Amazon beat earnings expectations comfortably, whilst Alphabet shrugged off a €5 billion fine. This original FAANG trade, which petty much guaranteed impressive returns across previous years, suddenly looks a lot more complicated.  Whilst prior to the year these stocks could do no wrong, suddenly that is no longer the case.

Apple Reports on Wednesday

Apple will be reporting on Wednesday, a strong set of results will draw a line in the sand between Facebook, Netflix, and the better performing Amazon, Alphabet and possibly Apple. Under these circumstances, we would expect to see Facebook and Netflix fallaway from the rest of the FAANG group.

Earnings will remain a key focus this week as earnings season continues in the US with the likes of Apple, whilst in the UK the banks will be releasing their updates. In addition to BP and Capita earlier in the week.

3 Central Banks; 3 Possible Outcomes?

Central banks will dominate the week ahead with policy updates from the BoJ, BoE and the Federal Reserve, with each looking towards a different action.

The pound was trading flat at the start of an important week. With Brexit noise expected to die down, investors will be able to focus squarely on the BoE rate decision. The markets are currently pricing in an 80% probability of a 0.25% rate hike, even though June inflation missed expectations by 0.1% at 2.4%. The build-up will provide a welcomed distraction after recent Brexit woes, which concluded for a summer break with dismissive comments from Michel Barnier towards Theresa May’s grand trade plan, prompting further fears of a no deal Brexit.

Theresa May promising to take control of Brexit negotiations personally is offering some support to the pound. However, a rate rise from the BoE could keep sterling buoyant whilst Brexit uncertainties weigh going forward.