Relief before earnings

The week starts with a relief rally in equities following a calm weekend on the geopolitical scene. The US 2-year yield pushes above 5% ahead of US GDP and PCE updates. Four of Magnificent 7 are due to report earnings this week.

Oil under pressure following calm weekend

US crude kicks off the week under selling pressure, near the $81.50pb level. But the $80pb psychological level, which also coincides with the major 38.2% Fibonacci retracement on December to April rebound, will likely act as a strong support to the actual retreat as the Middle East tensions could resurface anytime.

But, one thing that could send the price of a barrel below that level is a further fall in rate cut expectations from the Federal Reserve (Fed), and eventually the other central banks. Even though the European Central Bank’s (ECB) Villeroy said that the ECB shouldn’t wait much even though the Mid East tensions drive oil prices higher, there is little chance that the ECB will ignore a potential U-turn in euro area inflation dynamics on the back of surging energy prices and US dollar appreciation.

US two-year yield above 5%.

The strong economic data from the US and hawkish comments from the Fed members closed the door on the expectation of a summer rate cut from the Fed. The US 2-year yield has been testing the 5% level since 10th of April and looks ready to go above this week. The US will reveal the first estimate of Q1 GDP on Thursday and the core PCE price index on Friday. The US economy is expected to have grown 2.5% in Q1 and the core PCE is seen flat on a monthly basis and lower on a yearly basis. Atlanta Fed’s GDPNow forecast points at a first quarter growth of nearly 3% and the last three CPI prints in the US surprised to the upside. Risks to the US economic data remain tilted to the upside.

Is it a bad thing? Robust growth is good news for everyone if inflation continues to slow. Otherwise it’s bad news, because it means that the Fed should try harder to fight inflation by keeping its monetary policy at a sufficiently restrictive level to slow down the economy and eventually push it into recession. Therefore, the combination of growth and inflation will give investors the next indication regarding how far the Fed stands from its first rate hike. Activity on Fed funds futures gives more than 50% for a September rate cut. And because September is too close to November elections, that could delay the first cut to the end of the year. Voila.

All eyes on magnificent seven

The S&P500 and Nasdaq have significantly decoupled from the yields and the Fed expectations since last year as the AI rally fueled optimism in technology stocks and sent these indices to record levels. But the first set of earnings from the most popular chip stocks disappointed last week. Both ASML and TSM reported their Q1 results last week, and both companies failed to satisfy investors despite highlighting that the AI should continue to boost their revenue and profits this year.

This week, 4 of the Magnificent 7 companies will be revealing their Q1 results: Microsoft, Google, Meta and Tesla..

And if the tech stocks can’t boost appetite, the rest of the S&P500 will hard it hard to do so. The S&P500 index is expected to print a 4% earnings decline in Q1 – a decent contrast with the +38% expected for the Magnificent 7. And among the Magnificent 7, Tesla and Apple don’t look promising. So all hopes rely on 5 stocks. 5 stocks will determine where the S&P500 should be headed next.