Big tech rebound ahead of earnings, Oil slips

Week started on a bullish note in Europe and the US as Jow Biden’s decision to leave the presidential race didn’t impact the market mood. The S&P500 rebounded 1% following its worst week since April on a Big Tech selloff and on rising worries that a second term for Donald Trump in the White House would worsen the global trade relations. Nasdaq 100 gained more than 1.50% as Magnificent 7 climbed 2.5% led by a nearly 5% jump in Nvidia and a more than 5% jump in Tesla.

Tesla and Google are due to report earnings today after the bell, and their results – or the reaction to their results – could shift the wind in either direction. Despite almost doubling its stock price between April and July, Tesla sees appetite for its cars and its market share under pressure, and the company’s operating profit is expected to shrink in the Q2 for the 6th straight quarter. What keeps optimism alive for Tesla is the robotaxi plan. But robotaxis will cost to the company before it can generate profit. Therefore, the recent gains may not find a solid ground to let the share price extend gains. The key support to the robotaxi-led rally stands at $220 per share, the major 38.2% Fibonacci retracement on April to July rebound. For Google, investors will be closely watching the cloud revenue and whether the AI spending is making a difference for the ad revenue. For this quarter, analysts are expecting impressive numbers: Google’s earnings per share is expected to have risen from $1.44 to $1.85 and its revenue from $74.6 to $84.35 billion. This would mark a significant increase from the same period last year and give hope that the AI trade is not yet exhausted. The risk is, given the sky-high Big Tech valuations, any delay in AI revenue, any unpleasant detail, or any misstep could have a sector-wide negative impact and lead to a rapid selloff in AI-related stocks.

In Europe, the Stoxx 600 gained more than 1% on Monday. The earnings season started on a relatively positive note with around 30% companies beating profit expectations, but luxury and airlines don’t look in a great shape. Ryanair shares plunged 15% after the company cut its summer fare forecast because of ‘materially lower’ ticket prices on growing reluctance from consumers to carry on the weight of higher prices. That’s bad news for company profits but it’s clearly good news for inflation expectations. It means that the companies are visibly losing their pricing power, and should stop hiking prices if they want to sell their goods and services to people who continue to struggle with ongoing cost-of-living crisis. In the same context, Mc Donald’s is also looking to extend its $5 value meal in most Us markets as they think that the deal boosts traffic in its stores. All encouraging news for your central bankers.

FX, bonds and energy

The US 2-year yield consolidates near the 4.50% level, the 10-year yield is sitting close to 4.20% and the US dollar index remains offered near its 200-DMA. But the USD weakness is countered by higher expectations of rate cuts from other major central banks. The euro bulls for example remains timid into the $1.10 mark, while Cable is back below the 1.30 level on uncertainties regarding the Bank of England’s (BoE) next move. In Japan, the yen gains some strength on FX interventions and on some hawkish expectations building into next week’s Bank of Japan (BoJ) meeting that could bring a rate hike, according to some. We hear growing pressure from the political figures as well. A senior official from the ruling party has urged the BoJ to clearly communicate its plan to normalize monetary policy through steady interest rate hikes, noting that the excessive decline of the yen is harming the economy. Prime Minister Kishida also emphasized that normalizing the central bank’s monetary policy would support Japan's transition to a growth-driven economy. As such, the yen is coming to a crossroads near 155 against the US dollar. Either a concrete BoJ action will back a further rise in the yen and back a further decline in the USDJPY toward the 150 level, or the pair will remain within an infernal cycle and go back to the 160 level on unresponsive BoJ. Elsewhere, the BoC is expected to trim its rate by 25bp when officials meet tomorrow.

In energy, US crude slipped below the $80pb psychological and Fibonacci support and tipped a toe below the 200-DMA despite a surprise People’s Bank of China (PBoC) rate cut, the reflation-positive market environment and supply concerns on rising geopolitical tensions in the Mid-East and Canadian wildfires. The expectation that OPEC will starts unwinding its production restrictions in Q4 and the rising odds that Trump presidency would further boost the US production take the upper hand. From a technical standpoint, oil has now stepped into the medium-term bearish consolidation zone and could experience deeper declines. Next support is seen at $78.60/80 region and should be strong given that the rising expectations of rate cuts from the major central banks is still positive for oil prices, while offers now look crowded into the $80pb level.