Uncertainty looms ahead of Mag7 earnings, rate decisions

The week kicked off on a mixed note. Equities in Europe fell, the major US indices were near flat, slightly positive for the S&P500 and Nasdaq, and slightly negative for the Dow Jones, as technology stocks extended a rebound into a second day while oil stocks retreated on a further selloff in crude oil.

US crude fell another 1% yesterday and is testing the $76 support to the downside this morning, while Brent crude extends losses below the $80pb psychological mark on desperation regarding the hard-to-revive Chinese growth and ample American supply. A decision from OPEC later this week to delay unwinding its supply restriction measures could limit losses, as the cartel has no interest in letting the price of a barrel sink further below the $80pb. Saudi for example needs oil prices to be within the $70/80pb range to balance its budget. Therefore I would be more surprise than not if OPEC kept their plan to unwind production cuts next quarter. As such, almost oversold conditions in crude suggest that the current levels could be interesting dip buying levels for those who bet that oil prices shouldn’t dive below the $75pb and 78pb levels for US and Brent crude respectively.

Earnings, earnings

Roundhill’s Magnificent 7 recovered another 1%. Tesla was the major boost among the 7 as its stock price jumped more than 5% thanks to a bullish call from Morgan Stanley. ON Semiconductor jumped 10% after reporting better-than-expected Q2 revenue and earnings. Remember, TSM also revealed strong earnings in the Q2, meaning that the Q2 performance of chip companies are looking good. Alas, ON may find it hard to clear a major Fibonacci resistance, the $80 per share, level which will allow it to return to the bullish consolidation zone at a time of rising worries and questions about whether AI investments will turn out to be as promising as people thought they would for companies that heavily invest in them. Nvidia retreated 1.30% at a session which was otherwise not too bad for the Big Tech companies. Even Apple closed slightly in the positive despite revealing that their AI models will miss the next product release, but will come soon after. Phew.

Anyway, Microsoft will reveal its Q2 earnings today, after the bell. Its data center growth will be largely in focus, and may meet and even beat expectations as Big Tech companies continue to spend big on AI tools. But strong results may not spark the same enthusiasm than in the previous quarters if companies like Facebook and Google don’t confirm AI’s positive impact on their revenues.

In non-tech, McDonald’s saw its share price jump almost 4% but announced that its sales fell for the first time since the end of 2020. The profit fell 12%. And the company’s CEO says that the value deals start resonate among low income groups – which may explain why the stock price jumped after weak results – but one or two value items won’t be enough to bring masses back to its restaurants. But McDonald’s results is another example – along with what the airlines say – that consumers are now seriously pushing back against rising prices and that points at taming inflationary pressures.

Rate decisions

Funnily, one place where McDonald’s saw its business do well was Japan, given a significant foreign tourist rush to the country on weak Japanese yen, as the USDJPY hit a 38-year low back in July. Nowadays, the yen is better bid on expectation that the Bank of Japan (BoJ) will start normalizing its policy. (I’m sorry there was a mistake in yesterday’s note as I said that the BoJ would announce QT and even lower rates. I meant that they will HIKE rates to normalize). QT and higher BoJ rates could give a further support to the yen, but nothing is less certain than what the BoJ will announce tomorrow. Risks prevail.

The Federal Reserve (Fed) decision on the other hand will certainly trigger no fireworks as Jerome Powell will likely hint at an upcoming September rate cut. The US dollar is on the rise before today’s JOLTS data and Wednesday’s Fed decision. The EURUSD sank below its 200-DMA ahead of a series of inflation, sentiment and growth data from the Eurozone, while pound traders' hearts are pounding toward the bearish side, with growing expectations that the Bank of England (BoE) could announce a rate cut as early as this Thursday.