Next week tech earnings pick up speed and expectations are low for results for companies in the S&P 500. Year-on-year growth is expected to decline 11.2%, quite the contrast to the financial, who reported this week and delivered earnings growth. The trade war has weighed on tech stocks and multi-nationals, keeping investors nervous we could see drastic cuts in guidance next week. After yesterday’s close, Microsoft delivered impressive earnings, which emphasized their success with their cloud strategy. The tech-giant’s results have initially eased some concerns of the effects of the trade-related slowdown.
The key driver however for US stocks and the dollar remain the Fed. Yesterday, NY Fed President John Williams noted that the Fed should be aggressive when confronting an adverse outlook. Markets quickly increased the odds for a 50-basis rate cut at the end of the month. A few hours later, a New York Fed spokesperson had to issue a correction and stated that Fed Williams’s speech was not about potential policy action but a reflection of research. We are quickly approaching the blackout period and today we could get more clarity from two doves, Bullard and Rosengren.
Euro weakness is stemming from a broadly stronger dollar and political concerns that Italy’s government could collapse. Italy’s de facto leader Salvini signaled he won’t resign immediately. Tensions are growing between the anti-establishment 5-Star movement and the far-right nationalist. Fresh elections may not happen over the weekend, but they will most likely happen soon. A steep decline with the German PPI report, the largest monthly slide since early 2016 did not help the euro.
The Canadian dollar tumbled after Canadian retailers posted a surprising drop in sales in the month of May. Consumers reduced expenditures on clothing, alcohol and food. The Canadian dollar weakened over half a percentage point as markets have been used to a recent string of better than expected Canadian data. Rate cut bets by the end of the year for the Bank of Canada also popped following the dismal sales reading, with markets now seeing a 60% chance, up from just under 50% before the release.
President Trump stopped oil’s slide when he reported that the US downed an Iranian drone near the Strait of Hormuz. Iran refuted Trumps comments and it seems markets got a good reminder that it will be unlikely to see an easy return to the negotiating table for Trump and the Iranians. Crude prices have been weighed heavily on falling demand concerns and as production returns from both the Gulf of Mexico and the Russian contamination issue, but that could be short-lived once markets solely focus on the beginning of the Fed’s easing cycle.
Oil could see major support from the Fed’s easing cycle, in 1995 oil prices doubled when the Fed lowered interest rates.
Gold prices rallied after President Trump said the US downed an Iranian drone, bursting the bubble of optimistic banter that we could see Iran return to the negotiating table. Gold is struggling to breakout from its pennant formation and could see some range trading until we get to the Fed’s rate decision at the end of the month.
Bitcoin pared yesterday’s gain after the G7 warned of serious risks that are coming from Libra and other digital coins. Thursday saw a huge $1,000 spike that stemmed from short-seller profit taking. Volatility will remain in place for Bitcoin, but we could see some stabilization for digital coins as the regulatory process will take years to take form. Facebook’s grilling earlier in the week showed Congressional leaders don’t have the authority to regulate Libra like the Fed can with banks.