Speculation that the worst of the selloff has passed is partly behind the move. But angst about the damage from inflation, rapidly rising interest rates and recession fears is proving hard to shake despite a tempering in expectations for Fed aggressiveness this coming Thursday.
“The Fed meeting is crucial,” Quincy Krosby, chief global strategist at LPL Financial, said by phone.
“Does the Fed rhetoric become less hawkish? Because what the market may be expecting that the Fed goes into the summer months and comes out perhaps a little bit less hawkish. But it’s a question mark because it depends on the trajectory of inflation.”
In other earnings news, American Express rallied after reporting record revenue and raising full-year forecasts. Verizon Communications Inc. slumped after it missed profit estimates and cut guidance. HCA Healthcare Inc. soared after an earnings beat.
Snap’s results have become a barometer for ad spending amid mounting economic concerns. There are growing signs that tech companies are preparing for a recession with some pulling back on hiring, while Meta has lost about half of its value this year after disappointing revenue forecasts. Meta and Alphabet are scheduled to report earnings next week.
Underscoring recession fears, Treasuries extended an advance, pushing the 10-year yield to around 2.7 per cent. US business activity contracted in July for the first time in more than two years, according to the S&P Global flash composite purchasing managers output index.
That prompted swaps traders to pare bets on Fed hikes, shifting toward pricing a 50-basis-point hike in September as more likely than a three-quarter-point move. Swaps targeting next week’s meeting briefly indicated a 75 basis-point increase was slightly less than certain.
Meanwhile, German short-term bonds soared as investors trimmed bets on European Central Bank rate hikes after weaker-than-expected PMI data in the region fanned fears of a recession.
In more market commentary:
- “The market has experienced a selloff due to multiple compression, not due to lower earnings,” Alicia Levine, head of equities, BNY Mellon Wealth Management, said in an email. “The recent earnings in social media are a reminder that there is earnings risk in these pummeled sectors … which still may not be priced into the market. Further, there macro risk to earnings in general after weak US and European PMI’s this morning.”
- “Expectations heading into the reporting cycle are ultra-low and well priced in most sectors,” Art Hogan, chief market strategist at B. Riley Wealth, wrote. “Another potential positive is that market participants may have reached a peak in pessimism at the same time that inflation has likely peaked. With pessimism at a peak, and inflation receding, the market may be at the ever elusive capitulation point and see more constructive action in the second half.”
- “The message of the week is clear: bulls clearly took control of markets,” said Florian Ielpo, head of macro research at Lombard Odier Asset Management. “For now, sentiment is in the driver seat and the previously excess pessimism is now resulting in a relief rally: investors cannot complain about that.”
- “It’s still very early days but we’ve seen numerous cases now of earnings surprises driven by the ‘it’s not as bad as we feared’ argument,” said Craig Erlam, a senior market analyst at Oanda. “That’s a relief of course, but surely not a case for a sustainable rebound.”