Stocks in Europe fell in early trading as the clutch of soft earnings update from the US pricked some of yesterday’s giddy optimism that rates are close to peaking. The FTSE 100, which wasn’t swept up in the interest rate frenzy, is steady but shares in Frankfurt and Paris are about 0.6-0.8 per cent weaker after a huge run up for US tech the day before.
That jolt higher for tech was led by hopes the Fed was near its peak and by a huge rally for Meta shares. All the garbage like ARKK also did well on a day that does not tell me the bottom is already in. It’s a push-me pull-me on earnings and peak rate bets.
Apple posted a decline in quarterly revenues for the first time in almost four years. Alphabet shares also declined more than 4 per cent after it reported only the second quarterly contraction in advertising sales. Amazon shares also declined in the after-hours trading as its cloud business suffered a slowdown. Read more on the updates here.
Bank of England
Markets now think there is a higher chance of the Bank Rate peaking at 4.25 per cent than 4.5 per cent...markets bet that it is close to the peak and sterling retreated sharply.
The Bank of England raised rates by 50bps, as expected, and signalled that it would tighten further if inflation pressures persist – and added that the risks are to the upside. But it also lowered the estimates for medium term wage growth, which hints that the Bank thinks it’s near the peak. Just like the Fed, we’re back to data-dependence.
On inflation, the BoE says risks are skewed significantly to the upside but thinks inflation has peaked; sees inflation at 3 per cent in one year. Wages are not seen racing higher and should stop sterling from extending gains. In fact we see the Bank reducing its wage growth estimate to +2.25 per cent in Q4 ‘24, from +2.75 per cent forecast in November; down to +1.5 per cent in Q4 ‘25 from 2 per cent three months ago.
On growth, the BoE sees a shorter, shallower recession than it did in November – decent upgrades to the forecasts as was anticipated thanks to lower energy costs and lower market rates.
There’s a strong smell of fomo
There is a strong smell of the fear of missing out (fomo) in this market – many of us didn’t think it should have rallied – or at least that it’s a bear market rally ready to fall to earth. So when it starts to grind up in a more deliberate manner, people incrementally start joining in – you wouldn’t want to miss out now if the bottom really was last year.
The Fed’s wishy-washy, we don’t care about a bubble, it’s all going to be fine, financial conditions are easing narrative has only fueled this further... for now it’s far from a slow grind higher. Yesterday’s huge jump in the Nasdaq on hot air – followed by disappointing earnings from the tech giants – underscore that there is still a huge amount of uncertainty and disagreement about where this market sits right now.
Markets seem giddy about rates getting close to peak but the earnings last night’s earnings underscored the headwinds this year for equities. And markets still think the CBs will be easier than they will be.
Neil Wilson is the Chief Market Analyst at Finalto
