Without of a hawkish stance from the BoJ, the USD/JPY will likely continue its upside trajectory

The week started on a hopeful note after the de-escalation of tensions between Israel and Iran. Gold shortly fell below $2300 per ounce in Asia. Brent dipped below the $86pb level, as US crude tested the 50-DMA to the downside. Equities rebounded. The Stoxx 600 index jumped past the 50-DMA and the 500 psychologic mark, while the S&P500 regained the 5000 handle.

On the economic calendar, a series of PMI data are expected to confirm a slight improvement in global activity levels. But the data will also highlight the growing divergence between the US where manufacturing is gaining further momentum in the expansion territory and Germany, which is still deeply in the contraction territory with manufacturing PMI sitting between 41-43 range. The PMI data will hardly prove those betting for diverging Federal Reserve (Fed) and (European Central Bank (ECB) policies wrong, and should back a further slide in the EURUSD toward the 1.05 level.

Elsewhere, the yen bears are cautiously pushing the USDJPY toward the 155 psychological resistance to see if that level would trigger a response from the Japanese authorities – which eventually won’t matter beyond clearing the short-term bears. In the absence of a hawkish stance from the Bank of Japan (BoJ), the USDJPY will likely continue its upside trajectory. Cable, on the other hand, is slightly better bid after tipping a toe below the 1.23 on Monday, backed by a growing chorus that the Bank of England (BoE) will eventually hike its rates before the Fed.

In the absence of major economic data today, like jobs, growth and inflation, FX traders will continue to digest the idea that the Fed is moving away from the rate cutting dream and let the US and European treasury auctions and S&P500 earnings gain the headlines.

How bad doctor?

The expectations regarding Tesla’s Q1 performance are weak - to say the least. The profit is seen down by 40% compared to the same time last year, the car deliveries were down by 8.5% in Q1, the controversial price cuts didn’t help Tesla gain market share, but they will certainly cause a sizeable profit meltdown.

But alas, the company decided that it would continue to cut the price of its vehicles again last weekend and said that Musk is willing to cut 20% of jobs globally after announcing, last week, that it would cut 10% of its global workforce and abandon the idea of a cheap model – that could’ve boosted profits rapidly - and prioritize Elon Musk’s robotaxi dream – which will hardly show in results in a predictable timeline to justify the company’s still hefty market valuation. Plus, thousands of Cybertrucks were recalled due to technical problems and Elon Musk is pushing for his $56bn pay package amid growing controversies regarding his decisions and future perspectives. The company’s share price and the PE ratio are going down rapidly, and there are not many barriers to slow down or reverse the selloff.

Tesla dived another 3.40% yesterday and the PE ratio is now below 55. The selloff could continue if the company fails to convince investors on three major points. 1. Are sales continuing to fall after the sharp Q1 decline? 2. Is it a good idea to continue cutting the price of EVs provided that the latest cuts didn’t necessarily help boost sales? 3. Are robotaxis and self-driving cars realistic in terms of profit and growth?

Too much optimism kills optimism

Elsewhere, optimism regarding the S&P500 earnings reigns - which to me is an alarming sign. A recent Bloomberg survey showed that almost two-thirds of people surveyed expected the earnings give a further boost to the S&P500 – that’s apparently the highest vote of confidence for corporate earnings since the beginning of the poll in October 2022. And when confidence is this high, it often suggests that we are getting closer to a turning point. We start seeing an increased volatility – a sign of rising stress – in the most popular tech stocks. This earnings season will certainly not go down the market’s throat as smoothly as present optimism suggests. Even less so as the Fed expectations are no longer supportive of market valuations.