US equities kicked off the week on a bearish note and technology stocks led to losses on Monday. News of a fatal Tesla crush on Saturday, rising Covid cases that hurt the younger groups, and tensions before big US corporate earnings pushed investors to the sidelines.
Sentiment in Asia was mixed, while European futures hinted at a neutral start on Tuesday.
The bank and energy-heavy FTSE 100 struggles near the 7000p mark as firmer sterling weighs on the British blue-chip appetite.
Gold advanced to $1790 per oz on the back of the rising inflation expectations following a jump to 2.6% in US inflation in March, and the subdued US yields. Yet, the US yields should remain steady to allow a sustainable push above the $1800 per oz, given that the prospects of a quick rise in US funding costs is the biggest threat to gold holdings in the foreseeable future.
But the same worry doesn’t seem to weigh on US stocks, on the contrary. According to Goldman Sachs, the short interest in stocks fell to a 17-year low of 1.6% as Wall Street unwound its short exposure to the market on the back of endless monetary stimulus and perhaps to avoid getting burnt in a renewed short squeeze frenzy.
As such, stocks are poised to extend gains through uncharted territories, even with the valuations that do no longer make sense as stock prices trade on average near 40 times this year’s earnings and some 23 times the next year’s earnings according to Bloomberg. Suppressing shorts is now adding a perilous asymmetry to the market valuation and increases the risk of seeing a bigger bubble built as we inevitably move toward tighter financial conditions on the back of improved economic data.
And given the actual pricing, investors expect companies to live up to expectations to justify the positive trend despite the overblown stock prices.
Netflix earnings will be the main highlight of the day. Results will fall after the closing bell and expectations are rather strong given the strict lockdown measures that kept many stuck at home in the first quarter of 2021. Expectations are 6 million new subscribers, $7.1bn in net revenue and earnings per share up to $2.98. Moreover, the company is expected to have reached the breakeven level on its cash flow thanks to lower production costs due to the pandemic. Netflix recently announced it doesn’t need to raise external cash for day-to-day operations and it considers stock buybacks moving forward, for the first time in a decade. Yet, the arrival of spring and business reopening are major risks for Netflix revenues, combined with higher subscription fees and a tougher competitive environment in on-demand video streaming industry.
In the FX, Cable hit 1.40 ahead of Wednesday’s inflation data and Friday’s flash PMI figures. The business reopening and peak in consumer spending should keep the GBP-bulls in charge of the market.
The EURUSD, on the other hand, extends gains above the 1.20 mark on news that Europeans secured additional 100 million doses of the BioNTech and Pfizer vaccine. Still, the growing European Central Bank (ECB) balance sheet and a comfortably dovish policy stance from the ECB could quickly reverse the bullish trend in the euro later this week. The risks in EURUSD remain tilted to the downside.
In cryptocurrencies, Bitcoin remains under a decent selling pressure following its 15% plunge over the weekend. The market is now cleared from a large amount of leveraged positions and managed to keep its head above water above the $50K per coin. That’s positive news. However, the market could continue testing the $50K support, and if this psychological level is broken to the downside, we could see some more panic sell-off across the board. Tougher regulation is probably a major risk for Bitcoin and the crypto-industry at the moment, and investors are all eyes and ears regarding what the US policymakers have to say.
