Will earnings reverse the Fed-induced pessimism?

Optimism about a less dovish speech from the Federal Reserve (Fed) Chair Jerome Powell and a ‘not higher than expected inflation print earlier this week remained rather short-lived, as other FOMC officials didn’t beat about the bush and hinted at an imminent rate hike in the US.

Rate-sensitive Nasdaq fell the most among the major US indices, as losses in the Dow Jones, which is believed to be better equipped to cope with higher rates remained limited.

The US 2-year yield consolidates a touch above the 0.90% mark, and no matter how aggressive the hawkish Fed pricing has been, the yield will likely advance above the 1% soon, and we will see more flattening across the curve.

In the FX, one would’ve expected the US dollar to recover on the back of a series of hawkish comments from the Fed officials, but the dollar index continued to move lower. It looks like the dollar bulls are out of breath and the bearish trend could further develop despite the clear hawkish shift in Fed expectations. The DXY is now preparing to test an important support band between 94 and 94.60, including the 100-DMA, and the major 38.2% Fibonacci retracement on May – December rally. Moving below the 94 mark should hint at a medium-term bearish reversal in the dollar index.

Investor attention shifts from macro data to corporate earnings as a couple of big banks are due to release their Q4 earnings today, including JP Morgan, Wells Fargo, BlackRock and Citigroup. There is no doubt that financials will benefit from a rising interest rate environment. Banks already outperformed the S&P500 last year and the trend is expected to continue throughout this year. And of course, the earlier and steeper rate expectations are a boon for the bank earnings expectations. But, expectations on bank earnings got quite high, which means that they now must live up to these strong expectations to keep the rally going. Therefore, if we see anything less than amazing in the big bank results, the wind could rapidly change direction. So, the risk is, even shiny results could result in price pullbacks.

On the other hand, good earnings are the only thing that could clear investors’ heads from the Fed-induced bearish thoughts.