Robust earnings defy hawkish Fed expectations

Tesla stole the light with a 15% jump on Monday after Elon Musk’s surprise visit to China resulted in a partnership with Baidu’s maps and navigation futures that cleared the way for Tesla’s full-self driving cars in China. In just a week, Tesla went from the least Magnificent of the Magnificent 7 companies to one that gives hope, again. The stock is up by 40% since last Monday’s dip, and the moves are based on new plans and projects that look to be exciting investors again. Cherry on top: the Chinese company BYD, which had recently claimed the title of the world's largest car seller, also missed profit estimates in Q1 as aggressive price cuts weighed on revenue growth. Aggressive EV price war could soon slow and push companies to seek new ways to differentiate themselves, and that’s what Elon Musk is busy doing right now.

Fed starts two-day meeting

The S&P500 advanced 0.32% while Nasdaq 100 gained 0.36% as the US 2-year yield remained a touch below the 5% level. The Federal Reserve (Fed) starts its two-day policy meeting today and deliver its latest policy verdict tomorrow. We are preparing to hear Jerome Powell ask for more patience and for more time to abate inflation. If that’s the case, we could see a further meltdown in Fed rate cut expectations. The next stop is no rate cut in 2024, which would be a cold shower for the bulls.

Earnings season goes well

Happily, the earnings season is going well. The latest stats suggest that over 80% of the S&P500 companies that have reported earnings so far beat expectations. Magnificent 7 companies have mostly lived up to high expectations as well. A part from Tesla, all the Big Tech companies announced better-than-expected results – although not all of them saw their stock prices react positively to the earnings.

All in all, the Q1 earnings are set to print a 4.7% EPS growth versus 3.8% estimated at the start of the earnings season, and the second quarter  earnings are projected to grow 9.7% - up from 9.5% projected earlier. And more importantly, the expectations don’t only improve for the Big Tech, but across many sectors hinting that the Big Tech rally could eventually broaden to the rest of the S&P500 sectors and keep the rally going. One major risk to that positive outlook is the Fed. If the Fed expectations turn undesirably hawkish, we could see the equity rally stall. That’s why the better-than-expected earnings see muted or unexpected market reaction.

Speaking of earnings, NXP jumped 6% in the afterhours trading after announcing better-than-expected Q1 earnings and strong Q2 guidance. Amazon is due to report its results today. AWS is certainly continued to fuel profits, but strong results may not satisfy tech investors if not accompanied by stock buybacks & dividends to prop up short-term appetite in the present high-yield environment.

Intervention talk

Monday’s session was spiced up with a rapid surge in the USDJPY – that hit the 160 before rebounding as strongly back – fueling speculation that the Japanese officials certainly intervened to stop the bleeding. The officials didn’t confirm an intervention because it doesn’t matter as long as intervention or the fear of it pushes the yen shorts out of the market. What matters is how the BoJ will prevent the yen shorts from staying away from the market, given that their relatively accommodative policy stance justifies further depreciation of the yen. The USD/JPY pair is now trading near the 156-157 area.

The euro bulls are struggling near the 1.07 level against the US dollar as Spanish and German inflation figures came in – mostly – softer than expected but with the fear of seeing the slowdown fade as governments remove support that had slowed rises in energy prices over the past year. Due today, core inflation in the Eurozone is expected to print a further retreat from 2.9% to 2.6% in April along with a slight improvement in GDP growth. If we don’t see a major surprise in data, the expectation that the European Central Bank (ECB) will opt for the first rate cut in June will remain intact, yet what will happen after the June meeting remains uncertain and will depend on whether inflation in Europe shows signs of heating up, and if yes, how badly.

This week, though , the Fed sentiment will likely outweigh the ECB expectations, and given the recent developments on the US inflation front, a dollar appreciation wouldn’t be a surprise.

Elsewhere, the Chinese manufacturing PMI hit a 14-month high while services PMI dropped to a 3-month low. US crude fell below $83pb on hope of ceasefire in Gaza, and cocoa futures tanked 15%  on higher margin calls and forced liquidations in the continuation of a selloff that started last Thursday on news that Nigeria, which is the world’s fifth biggest cocoa producer, said that its exports rose nearly 20%  in March. Hallelujah!