The rally in US stocks extended on the back of good bank earnings and AI. BoFA and Morgan Stanley joined the club of big banks beating analyst expectations. BoFA’s fixed income and equity trading posted a surprise gain and covered a slight miss on its net interest income, while Morgan Stanley’s wealth management came to the rescue. Charles Swab on the other hand reported 7% deposit outflows but its shares surged 13%, yes 13% yesterday on expectation of deposit growth by year-end.
Then, Microsoft jumped up to 6% to a fresh all-time-high yesterday as progress on the regulatory front regarding the acquisition of Activision Blizzard, and the news that its Microsoft 365 Copilot, based on OpenAI’s artificial intelligence, will be broadly available and cost $30 per month per user got investors rushing back to the stock and extend the November-to-date rally to 72%! Microsoft’s AI bet has been disruptive this year, and the company is making huge progress in turning the buzz into profit as quickly as possible, and they have a great chance of success. Microsoft’s AI will be a perfect assistant for $30 per month and Microsoft will cash in – and the weak dollar outlook could further help boost revenue.
Zooming out, the bank and AI rally pushed both the S&P500 and Nasdaq 100 to fresh highs since the first months of 2022. Nasdaq 100 is now in the overbought territory, the technical indicators call for correction, and the upcoming modification in the Magnificent Seven’s weightings in the index should pull the valuation down, but the positive trend’s strength remains impressive, and supported by both better-than-expected earnings, and economic data.
On the data front, the softer-than-expected retail sales and production data from the US came to soften the Federal Reserve (Fed) hawks’ hands yesterday, and kept the US yields downbeat, which also helped boost stock valuations in parallel to earnings.
Today, Goldman Sachs will try to beat the expectations that it threw under a bus over the past few weeks, so that the stock price could get away despite a worst quarter in years, Netflix will reveal how well its password sharing ban ramped up subscriptions and Tesla will reveal how much money the company earned by selling a record number of cars at discounted prices to increase market share. There is potential for good surprises for both, but expectations for Netflix and Tesla are strong, so they will certainly be harder to beat than the banks – which had rather soft expectations walking into this earnings season.
Yet Goldman didn’t only dampened expectations regarding its results but also lowered its recession odds from 25% to 20%. A latest survey of economists on Wall Street Journal also revealed that the probability of a downturn fell from 61% to 54% for the US. Weakening recession odds is good news for energy investors, and it keeps demand in oil upbeat. The barrel of US crude is back above the $75pb level this morning despite a smaller decline reported by the API report this week on US inventories compared to what was penciled in by analysts. But we need some good news from China for energy and mining assets to encourage some persistent rotation from AI, because AI just keeps on giving.
In the FX
The US dollar index consolidates at the lowest levels since April 2022, as the oversold market conditions certainly encourage short-term traders to pause and take a breather. Also helping are some dovish comments from European Central Bank’s (ECB) Knot yesterday, who said that monetary tightening beyond next week’s meeting is not guaranteed, while at least two 25bp hikes were seen as almost a done deal by markets until yesterday. Ignazio Visco also hinted that inflation could ease more quickly than the ECB’s latest projections. So the comments sent the German 2-year yield to a 3-week low. The EURUSD bounced lower after hitting 1.1275, and rising dovish voiced from the ECB could keep the EURUSD within the 1.10/1.12 range into the next policy decision.
Across the Channel, inflation numbers freshly came in this morning, revealing that inflation in Britain eased to 7.9% in June versus 8.2% expected by analysts and 8.7% printed a month earlier. Core inflation on the other hand fell below the 7% mark last month. Cable slipped below 1.30 as a kneejerk reaction as softer inflation tempered Bank of England (BoE) hawks. But even with a softer-than-expected figure, inflation in Britain remains high and stickier than in other Western economies, and that keeps odds for further BoE action sensibly more hawkish than for other major central banks. The BoE raised its policy rate to 5% at its latest meeting, and is expected to continue toward 6.5 to 7% range in the next few months. If inflation slows, the peak rate will be pulled to 6-6.5% range, but not lower. And rising rates, that weigh on mortgages in Britain where Brits must renew mortgages every 2-5 years, pressure housing market and fuels the worst living crisis in decades, combined with political shakes into next year’s elections are all factors that could stall the rally in sterling against major peers. Cable benefited from a broad-based weakness in the US dollar since last September dip, but gaining field above the 1.30 mark could prove difficult.