A Dead Cat Bounce, Can Earnings Season Save Tech?

A Dead Cat Bounce, Can Earnings Season Save Tech?

FOREX.com  | Jul 03, 2017 10:55

European equities are bouncing back this morning, reversing some of last week’s losses and protecting the FTSE 100 from dipping towards the 200-day sma. The dollar is also stabilising after a torrid week, and global bond yields are also backing away from last week’s lows. Things are quiet in comparison to last week, how much of that is down to the US public holiday and how much this is sustainable, we will have to see.

The rise in global bond yields last week, which included the UK 2-year yield rising above the 0.25% UK base rate for the first time since October, as well as relatively hefty rises for German and US yields, has set the tone firmly back in the bond bears’ favour.

Today’s bounce back in global bonds could be a result of news that China has opened up its bond market, by allowing foreign fund managers to purchase Chinese debt from Hong Kong. This could be a temporary salve that eases fears about a rout in bond markets, at least in the short term. However, if bond yields are set to rise then it is very hard to see how stocks can continue to outperform in Q3 and today’s price action could indeed be the bears pausing for breath.

Is it time for the bears to shine?

If we assume that bond yields have made a bottom and are likely to rise from here, the question is: can stocks continue to rise at the same time as yields? This means, can global companies continue to be profitable if their cost of capital rises, and can emerging markets and higher yielding entities survive if yields rise from exceptionally low levels in the West? Investors weren’t willing to take any chances last week, however at the start of a new quarter they are pausing for thought.

Understanding the malaise in the dollar

The dollar may be pulling back on Monday, but the dollar index remains well below its average level for the past year, which stands at 98.70, the current level is 95.98, nearly 3 big figures lower, which highlights how far the buck has fallen. The reason for the buck’s malaise is twofold, firstly the political backdrop; the dollar is being used as a hedge against the political risks associated with President Trump and the interminable delay with the application of the political promises he made prior to last year’s election. Secondly, could investors’ distaste for the dollar also be a sign that they are hedging their bets on the Fed, just in case they back down from their rate-hiking cycle on the back of Trump’s failure to implement his economic policies? That point is worth watching, any sign in this week’s Fed minutes that Yellen and co. are seriously concerned about the prospect of fiscal policy could have a major impact on the direction of US monetary policy for the rest of this year.

Of course, the more immediate gauge for Fed policy could come from the US employment data due out on Friday. The market has become convinced that inflation will emerge and wages will rise, however, another weak month for US wage data could trigger a reversal in the US bond market, with yields falling once again. If the recent price action prevails, then a weak labour market report could drive stocks higher once again.

Sweden poised to ditch the dovish agenda

Elsewhere, the Swedish Riksbank is meeting on Tuesday, which will be a test to see if the pandemic of monetary policy normalisation that is sweeping through Western central banks will spread further north. The Riksbank has been known to disappoint the hawks, however, there is a limit to how long it can maintain negative rates and a QE programme when growth is strong and the ECB seems to be setting the stage for a roll back of stimulative policies. Any sign that the Riksbank will follow suit is likely to lead to a wave of SEK buying, particularly against the euro initially, which is the most liquid of the SEK crosses.

In terms of stocks, look out for our earnings season cheat sheet due later this week. After last week’s stock market selloff, we will be watching to see if the rotation out of tech and into financials is over and done with. We tend to think not. As tech comes increasingly under the spotlight of both media investigations and more costly political ones the sector may continue to suffer. As we know with financial stocks, the prospect of getting on the wrong side of the global regulators can impact the attractiveness of a sector, and we expect investors to be more restrained when it comes to tech stocks in H2, compared to H1. Of course, a good earnings season for the tech giants could change investors’ minds, but usually increased regulatory scrutiny limits both innovation and profit-making ability in a sector to the detriment of a stock price. It could be a long yet cold summer for tech.

Disclaimer: The information and opinions in this report are for general information use only and are not intended as an offer or solicitation with respect to the purchase or sale of any currency or CFD contract. All opinions and information contained in this report are subject to change without notice. This report has been prepared without regard to the specific investment objectives, financial situation and needs of any particular recipient.

Any references to historical price movements or levels is informational based on our analysis and we do not represent or warrant that any such movements or levels are likely to reoccur in the future. While the information contained herein was obtained from sources believed to be reliable, the author does not guarantee its accuracy or completeness, nor does the author assume any liability for any direct, indirect or consequential loss that may result from the reliance by any person upon any such information or opinions.

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