Written by: Edward Moya | OANDA
Stocks rally on earnings and as China's economy awakens, Brookfield, Oil dips, Gold struggles as Wall Street goes risk-on, Bitcoin back above $30k
Wall Street is becoming a little bit more optimistic as more companies delivered strong earnings (Bank of America, BNY Mellon, J&J, & Lockheed Martin posted strong results, while Goldman Sachs was the lone weak report) and as China’s recovery is clearly here but not clicking on all cylinders. Today’s mood is about profitability concerns may have been overdone for the quarter, but Fed tightening fears won’t be going away anytime soon. If earnings continue to impress, too much of a good thing will ultimately prove to be inflationary and that will likely mean more Fed tightening. So this stock market rally might struggle to extend beyond the February highs.
The initial stock market rally started to unravel after hawkish comments from Fed's Bullard made some traders worry that we might be debating three more Fed rate hikes and not just two.
Big Banks Part 2
Goldman Sachs and Bank of America delivered two different earnings stories. Goldman Sachs disappointed as they missed on fixed income trading and dealt with the selling of parts of their Marcus loans portfolio. Goldman’s net revenue of $12.22 billion missed the $12.8 billion estimate as the Marcus partial sale included a loss of $470 million.
Bank of America told a similar story to the other big banks as first quarter results topped expectations with both the top and bottom line. CEO Brian Moynihan said “every business segment performed well as we grew client relationships and accounts organically and at a strong pace."
Commercial real estate remains a key market everyone's watching to see and that is why so many traders are paying close attention to the news that Brookfield defaulted on $161 million on office debt. Defaults happen with office properties and the big fear is will we see a steady stream of them that put strain on the system. Brookfield representatives have noted that 95% of their properties are trophy buildings. Everyone will be keeping their eyes on the regional banks that have heavy exposures to commercial real estate loans.
The China reopening trade is finally here. It isn't perfect as weakness exists with industrial production and property investment, but overall the fastest growth in a year should be good enough to boost risk appetite. After three years of a zero-Covid policy, China’s economy expanded 4.5% in the first quarter of year compared to the same three months a year earlier, better than the consensus estimate of 4.0%. China’s rebound is being driven by consumption as retail sales surged 10.6%, well above the 7.5% consensus estimate.
China’s recovery is unbalanced but still remains on track. The second quarter should pick up noticeably but that might not necessarily be accompanied with easing by the PBOC. NBS spokesman Fu Linghui noted that the economy’s rebound is “not yet solid” and this is dealing with a “complicated international environment” and insufficient domestic demand. If this quarter shows signs it won’t be impressive, the PBOC will clearly step in, so that should keep investors optimistic about the recovery.
Oil is struggling here as the details behind China’s impressive first quarter included lackluster March industrial output. A key German investor sentiment survey also weighed on crude, as optimism for the eurozone’s largest economy remains downbeat in the coming quarters. Oil isn't getting any good news here and that means prices could continue to hover around the $80 a barrel level, or even see a tentative dip below if sellers get some help from a strong dollar.
Gold was struggling for gains as the surge in Treasury yields takes a break because earnings season has investors tentatively on risk-on mode. Not much safe-haven flows are being triggered given last night’s impressive China’s GDP numbers and today’s strong earnings results from J&J and Bank of America. Gold will have its day in the sun, but it might have to wait a little while longer.
Gold is trying to hold onto the $2000 level, but critical support may come from the $1970 region.
Bitcoin is back above the $30,000 level as risk appetite returns and optimism grows that new investment is coming back into the cryptoverse. Bitcoin appears like it might consolidate here, but a rally above $31,500 could open the door to some momentum trades.
Related: What a “Whiplash Market” Implies for the Balance of the Year