Tech companies that have acted as growth drivers for stock markets in recent years are increasingly losing their leading positions. The initial reaction to the reports of Microsoft and Alphabet makes it seem more like a threat to the recovery of the Nasdaq and S&P500 indices. Shares of both giants are losing around 6.6% on the post-market.
Microsoft's revenue and profit beat expectations, but investors see more negative numbers in the dynamic (-3.4% QoQ on revenue and -14.4% YoY on profit).
Alphabet noted a tough time in the ad market, with an overall profit fall of 26.6% y/y despite revenue growth of 6.6% y/y. The latter is the lowest rate in 9 years.
Experienced traders have long noticed that companies are likely to present the situation to industry analysts, so they make low projections. And easily beat them shortly after in ¾ of the cases. It is, therefore, not uncommon for neutral numbers or a slight overperformance to lead to a share price slump.
Microsoft's revenue and profit beat expectations, but investors see more negative numbers in the dynamic (-3.4% QoQ on revenue and -14.4% YoY on profit).
Alphabet noted a tough time in the ad market, with an overall profit fall of 26.6% y/y despite revenue growth of 6.6% y/y. The latter is the lowest rate in 9 years.
Experienced traders have long noticed that companies are likely to present the situation to industry analysts, so they make low projections. And easily beat them shortly after in ¾ of the cases. It is, therefore, not uncommon for neutral numbers or a slight overperformance to lead to a share price slump.
Also, in growth sectors, markets are paying increased attention to companies' forecasts. And they have been disappointed. Both Microsoft and Alphabet cited falling PC and ad sales. And that's bad news for the future.
On a more general level, the simple rule of thumb remains that the IT sector is inversely correlated with interest rate movements and is more vulnerable during the economic downturn for which many are now preparing.
Choosing from major US indices - the Dow Jones, S&P 500, and Nasdaq - the first looks the most promising, including more manufacturing companies and a smaller weighting on the IT sector. This driver change can already be seen in that the Dow Jones made its lows in early October, while the other two made their lows on 13 October.
Nonetheless, while two from this trio stay more than 20% below the peak and the US Fed forwarding market expectations to slower rate hikes, it looks like the bottom is already behind us.
On a more general level, the simple rule of thumb remains that the IT sector is inversely correlated with interest rate movements and is more vulnerable during the economic downturn for which many are now preparing.
Choosing from major US indices - the Dow Jones, S&P 500, and Nasdaq - the first looks the most promising, including more manufacturing companies and a smaller weighting on the IT sector. This driver change can already be seen in that the Dow Jones made its lows in early October, while the other two made their lows on 13 October.
Nonetheless, while two from this trio stay more than 20% below the peak and the US Fed forwarding market expectations to slower rate hikes, it looks like the bottom is already behind us.
Falling house prices in the US - not yet a sign of recession
The US housing sector has entered a cooling down phase, giving rise to sometimes very alarmist comments that this is the beginning of a collapse, comparing it with the global financial crisis. But we don't tend to dramatise the situation just yet, drawing attention to the high base.
The S&P Case-Shiller price index published on Tuesday marked the second consecutive month of decline in August, down 0.86% from 0.45% a month earlier. Data from the Federal Housing Finance Agency (FHFA) showed a 0.7% fall in August after a 0.6% fall in July.
The year-on-year growth rates retreated from a peak of 21% and 19% at the start of the year to 13% and 11.9%, respectively.
However, a look at the absolute values of the above indices only shows a return to trend levels after the market bubble from September 2020. The difference from the early 21st century is in the level of consumer debt. Moreover, fighting price pressure is now the Fed's top priority.
The US housing sector has entered a cooling down phase, giving rise to sometimes very alarmist comments that this is the beginning of a collapse, comparing it with the global financial crisis. But we don't tend to dramatise the situation just yet, drawing attention to the high base.
The S&P Case-Shiller price index published on Tuesday marked the second consecutive month of decline in August, down 0.86% from 0.45% a month earlier. Data from the Federal Housing Finance Agency (FHFA) showed a 0.7% fall in August after a 0.6% fall in July.
The year-on-year growth rates retreated from a peak of 21% and 19% at the start of the year to 13% and 11.9%, respectively.
However, a look at the absolute values of the above indices only shows a return to trend levels after the market bubble from September 2020. The difference from the early 21st century is in the level of consumer debt. Moreover, fighting price pressure is now the Fed's top priority.
In 2007-2012, price declines were despite the Fed's attempts to ease policy by pushing mortgage rates to historical lows to stimulate lending. Now mortgage demand has fallen to its lowest levels since 1997, as fixed 30-year rates have risen to 7.16% after a rate hike in key interest rates not seen in 40 years.
The US economy officially entered recession in early 2008, a few months after the annual house price trend turned negative. We now see double-digit price growth rates, double the "norm" between 2014 and 2020.
The housing market is often seen as a leading indicator of the economy, which is why many commentators rush to call two consecutive months of falling prices an omen. However, it is better to look at other indicators for signs of recession, and the housing market is just cooling a bit down from historic overheating.
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The US economy officially entered recession in early 2008, a few months after the annual house price trend turned negative. We now see double-digit price growth rates, double the "norm" between 2014 and 2020.
The housing market is often seen as a leading indicator of the economy, which is why many commentators rush to call two consecutive months of falling prices an omen. However, it is better to look at other indicators for signs of recession, and the housing market is just cooling a bit down from historic overheating.
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BoC smaller than expected rate hike not crushing CAD
There was an important signal today that monetary authorities in North America are ready to ease the pace of policy tightening faster than the market expects.
The Bank of Canada raised the rate by 50 points to 3.75%, although analysts, on average, predicted a repeat of September's move with a 75-point hike. While the Bank of Canada's commentary on the decision pointed to the need for further rate hikes, there is no getting around the fact that the central bank is now more concerned with fine-tuning its policy rather than chasing fleeing prices.
There was an important signal today that monetary authorities in North America are ready to ease the pace of policy tightening faster than the market expects.
The Bank of Canada raised the rate by 50 points to 3.75%, although analysts, on average, predicted a repeat of September's move with a 75-point hike. While the Bank of Canada's commentary on the decision pointed to the need for further rate hikes, there is no getting around the fact that the central bank is now more concerned with fine-tuning its policy rather than chasing fleeing prices.
The Bank has noted a slowdown in consumer price growth from 8.1% to 6.9% over the last three months. The situation in the USA is not much different, with inflationary pressures also declining. However, the fundamental difference is that the expensive dollar raises inflation elsewhere and reduces it in the USA. Hence, a more fine-tuning phase becomes more relevant for the Fed, too.
The #USDCAD reaction is also very indicative. From the highs near 1.3650, where the robots pushed the pair in the first moments after the release, it has rolled back 0.8% to 1.3540 in just over an hour. As a reminder, just three months ago, raising the rate less than the Fed was practically dooming the currency to fall. However, today the USDCAD is retesting October lows.
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The #USDCAD reaction is also very indicative. From the highs near 1.3650, where the robots pushed the pair in the first moments after the release, it has rolled back 0.8% to 1.3540 in just over an hour. As a reminder, just three months ago, raising the rate less than the Fed was practically dooming the currency to fall. However, today the USDCAD is retesting October lows.
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#WaveAnalysis
#EURUSD broke key resistance level 0.9985
• Likely to rise to resistance level 1.0165
EURUSD recently broke the key resistance level 0.9985 (top of the previous short-term wave (a) from the start of October).
The breakout of the resistance level 0.9985 was preceded by the breakout of the extended down channel from February – which accelerated the active short-term impulse wave (c).
EURUSD can be expected to rise further toward the next resistance level 1.0165 (monthly high from September and the target for the completion of the active wave (c)).
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#EURUSD broke key resistance level 0.9985
• Likely to rise to resistance level 1.0165
EURUSD recently broke the key resistance level 0.9985 (top of the previous short-term wave (a) from the start of October).
The breakout of the resistance level 0.9985 was preceded by the breakout of the extended down channel from February – which accelerated the active short-term impulse wave (c).
EURUSD can be expected to rise further toward the next resistance level 1.0165 (monthly high from September and the target for the completion of the active wave (c)).
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#WaveAnalysis
#DowJones rising inside C-wave
• Likely to reach resistance level 32635.00
Dow Jones recently broke the resistance level 31000.00 intersecting with the daily down channel from August and the 38.2% Fibonacci correction of the downward impulse from August.
The breakout of the resistance level 31000.00 accelerated the C-wave of the active medium-term ABC correction (2).
Dow Jones can be expected to rise further toward the next resistance level 32635.00 (monthly high from September and the target for the completion of the active C-wave).
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#DowJones rising inside C-wave
• Likely to reach resistance level 32635.00
Dow Jones recently broke the resistance level 31000.00 intersecting with the daily down channel from August and the 38.2% Fibonacci correction of the downward impulse from August.
The breakout of the resistance level 31000.00 accelerated the C-wave of the active medium-term ABC correction (2).
Dow Jones can be expected to rise further toward the next resistance level 32635.00 (monthly high from September and the target for the completion of the active C-wave).
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#Bitcoin has added another 3.3% in the past 24 hours to $20.8K, bringing the gain over the past seven days to 9%.
#Ethereum is growing at a higher rate, reaching $1570 (+5.8% in 24 hours and 21% in 7 days).
Over the last day, major altcoins added between 1.5% (#DOT) and 21% (DOGE). According to CoinMarketCap estimates, total cryptocurrency capitalisation surpassed the $1 trillion mark, up 3.3% on the day.
#Dogecoin was again buying from Twitter's acquisition by Elon Musk, who had previously said he might add the coin to pay for the social network's services. However, the latest rise looks more like a 'buy rumour' pattern, and it can't be ruled out that the pump will soon turn into a dump.
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#Ethereum is growing at a higher rate, reaching $1570 (+5.8% in 24 hours and 21% in 7 days).
Over the last day, major altcoins added between 1.5% (#DOT) and 21% (DOGE). According to CoinMarketCap estimates, total cryptocurrency capitalisation surpassed the $1 trillion mark, up 3.3% on the day.
#Dogecoin was again buying from Twitter's acquisition by Elon Musk, who had previously said he might add the coin to pay for the social network's services. However, the latest rise looks more like a 'buy rumour' pattern, and it can't be ruled out that the pump will soon turn into a dump.
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FX interventions kicking USD to correction
As we previously warned, major central banks worldwide that hold massive amounts of dollar securities are stepping up interventions to support their national currencies. On Wednesday, China, Japan, and Switzerland resorted to such measures. The UK and India used earlier the same tool.
Countries are using this short-term tool to stop the one-sided selling of their national currencies. A longer-term measure is to raise rates, but its side effect is that the time lag and the impact on the real economy, many of which are already heading for a recession, is too long.
On the speculative side, other consequences of this intensification of FX interventions are essential. More dollars are becoming available in the financial system, which counteracts the kind of liquidity drying that the Fed is engaged in by sharply raising rates and shrinking the balance sheet.
Central banks' very regular dollar sales set the stage for at least a corrective pullback.
As we previously warned, major central banks worldwide that hold massive amounts of dollar securities are stepping up interventions to support their national currencies. On Wednesday, China, Japan, and Switzerland resorted to such measures. The UK and India used earlier the same tool.
Countries are using this short-term tool to stop the one-sided selling of their national currencies. A longer-term measure is to raise rates, but its side effect is that the time lag and the impact on the real economy, many of which are already heading for a recession, is too long.
On the speculative side, other consequences of this intensification of FX interventions are essential. More dollars are becoming available in the financial system, which counteracts the kind of liquidity drying that the Fed is engaged in by sharply raising rates and shrinking the balance sheet.
Central banks' very regular dollar sales set the stage for at least a corrective pullback.
Yesterday, for the first time since January of this year, the DXY Dollar Index was 1% below its 50-day average, which acts as a medium-term trend signal line.
Looking at the chart outside the context of FX interventions, the sharp dip below the line calls into question the continuation of the dollar's rising trend. More locally, without the dollar returning to gains before the end of this week, the priority scenario for the FX market could be a correction in the DXY.
Given the total amplitude of the rally from the "double bottom" of January-May 2021 to the highs of September 2022, a pullback to the 104-105 area is possible. The target range's lower end was the Dollar surge's highs in March 2020.
The 200-day moving average, which serves as a long-term trend indicator, pulls into the same area. The upper boundary is the retracement area to the 61.8% level of the dollar's rise since the beginning of 2021.
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Looking at the chart outside the context of FX interventions, the sharp dip below the line calls into question the continuation of the dollar's rising trend. More locally, without the dollar returning to gains before the end of this week, the priority scenario for the FX market could be a correction in the DXY.
Given the total amplitude of the rally from the "double bottom" of January-May 2021 to the highs of September 2022, a pullback to the 104-105 area is possible. The target range's lower end was the Dollar surge's highs in March 2020.
The 200-day moving average, which serves as a long-term trend indicator, pulls into the same area. The upper boundary is the retracement area to the 61.8% level of the dollar's rise since the beginning of 2021.
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As most observers assumed, the ECB raised its key rate by 75 points to 2.0%. These are low rates by modern standards, but the eurozone last saw such rates 14 years ago.
Furthermore, the central bank indicated its intention to withdraw liquidity from the banking system to combat record inflation. Amongst other signals, there is a comparatively dovish guide to further policy tightening. The ECB is signalling its intention to raise the rate further to ensure that inflation returns to the 2% target.
We recall that official inflation was 9.9% YoY in September, and average forecasts suggest a further, albeit slight, acceleration in October. Such a message, in our view, indicates that the ECB remains on the side of the economy and maintains a catch-up role regarding inflation and other CBs (excluding the Bank of Japan). The first impulsive market reaction was to sell the euro and European debt securities, sending EURUSD temporarily below parity.
Furthermore, the central bank indicated its intention to withdraw liquidity from the banking system to combat record inflation. Amongst other signals, there is a comparatively dovish guide to further policy tightening. The ECB is signalling its intention to raise the rate further to ensure that inflation returns to the 2% target.
We recall that official inflation was 9.9% YoY in September, and average forecasts suggest a further, albeit slight, acceleration in October. Such a message, in our view, indicates that the ECB remains on the side of the economy and maintains a catch-up role regarding inflation and other CBs (excluding the Bank of Japan). The first impulsive market reaction was to sell the euro and European debt securities, sending EURUSD temporarily below parity.
Nevertheless, this is another signal in the piggy bank that key central banks are already coming out to slow the pace of rate hikes. The Bank of Canada did it yesterday, the Reserve Bank of Australia did it before that, the ECB warned of a slowdown today, and the Fed is signalling that along with a 75-point hike next week, we will hear a signal of further rate slowing.
Having seen a pullback in commodity and agricultural prices and having done some work on policy tightening, the key global central banks seem to be synchronising their policies and preparing to move to a finer tuning. This is a relatively positive shift for equity markets and an additional reason to correct the one-and-a-half-year rally in the dollar.
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Having seen a pullback in commodity and agricultural prices and having done some work on policy tightening, the key global central banks seem to be synchronising their policies and preparing to move to a finer tuning. This is a relatively positive shift for equity markets and an additional reason to correct the one-and-a-half-year rally in the dollar.
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#WaveAnalysis
#CHFJPY reversed from resistance level 150.40
• Likely to fall to support level 146.00
CHFJPY currency pair recently reversed down from the key resistance level 150.40 (which has been steadily reversing the pair from the start of September) strengthened by the upper daily Bollinger Band.
The downward reversal from the resistance level 150.40 started the active impulse waves (i) and (C) – which belong to the intermediate ABC wave (2) from the middle of September.
CHFJPY can be expected to fall further toward the next support level 146.00 (which stopped the earlier minor wave A at the start of October).
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#CHFJPY reversed from resistance level 150.40
• Likely to fall to support level 146.00
CHFJPY currency pair recently reversed down from the key resistance level 150.40 (which has been steadily reversing the pair from the start of September) strengthened by the upper daily Bollinger Band.
The downward reversal from the resistance level 150.40 started the active impulse waves (i) and (C) – which belong to the intermediate ABC wave (2) from the middle of September.
CHFJPY can be expected to fall further toward the next support level 146.00 (which stopped the earlier minor wave A at the start of October).
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#WaveAnalysis
#GBPCAD reversed from resistance level 1.5720
• Likely to fall to support level 1.5360
GBPCAD recently reversed down from the key resistance level 1.5720 (which has been steadily reversing the pair from the start of August) intersecting with the upper daily Bollinger Band.
The downward reversal from the resistance level 1.5720 stopped the previous impulse waves (iii) and (c).
Given the clear bearish divergence on the daily Stochastic indicator, GBPCAD can be expected to fall further toward the next key support level 1.5360.
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#GBPCAD reversed from resistance level 1.5720
• Likely to fall to support level 1.5360
GBPCAD recently reversed down from the key resistance level 1.5720 (which has been steadily reversing the pair from the start of August) intersecting with the upper daily Bollinger Band.
The downward reversal from the resistance level 1.5720 stopped the previous impulse waves (iii) and (c).
Given the clear bearish divergence on the daily Stochastic indicator, GBPCAD can be expected to fall further toward the next key support level 1.5360.
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#WaveAnalysis #GOOG
Google broke key support level 95.00
• Likely to fall to support level 90.00
Google recently broke the key support level 95.00 (which is the lower boundary of the sideways price range inside which the price has been moving from September).
The breakout of the support level 95.00 accelerated the active short-term impulse wave 1 of the intermediate impulse wave (3) from the end of October.
Given the persistent multi-month downtrend, Google can be expected to fall further toward the next round support level 90.00.
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Google broke key support level 95.00
• Likely to fall to support level 90.00
Google recently broke the key support level 95.00 (which is the lower boundary of the sideways price range inside which the price has been moving from September).
The breakout of the support level 95.00 accelerated the active short-term impulse wave 1 of the intermediate impulse wave (3) from the end of October.
Given the persistent multi-month downtrend, Google can be expected to fall further toward the next round support level 90.00.
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Nasdaq-100 performance to remain in the shadow of Dow Jones for months to come
The #DowJones is up 4.6% in the past five days versus 0.7% for the #Nasdaq-100. And this divergence in momentum may continue as long as monetary authorities remain in the regime of containing inflation rather than pushing it up as they have been doing since 2009.
The behaviour of the markets in February and May 2020 was the latest reminder that stocks could fall altogether, but recovery is closely dependent on changed circumstances. Then, thanks to monetary stimulus, the fate was on the side of “growth stocks”, widely represented in the Nasdaq-100, and now may shift to “value stocks”, which are more in the Dow Jones or the Russell 1000 Value.
However, until October, there was not much sense in picking leaders as stock indices were declining and the most obvious way to preserve capital was to buy dollars. Nevertheless, at the end of September, it seems the markets entered a new cycle.
The #DowJones is up 4.6% in the past five days versus 0.7% for the #Nasdaq-100. And this divergence in momentum may continue as long as monetary authorities remain in the regime of containing inflation rather than pushing it up as they have been doing since 2009.
The behaviour of the markets in February and May 2020 was the latest reminder that stocks could fall altogether, but recovery is closely dependent on changed circumstances. Then, thanks to monetary stimulus, the fate was on the side of “growth stocks”, widely represented in the Nasdaq-100, and now may shift to “value stocks”, which are more in the Dow Jones or the Russell 1000 Value.
However, until October, there was not much sense in picking leaders as stock indices were declining and the most obvious way to preserve capital was to buy dollars. Nevertheless, at the end of September, it seems the markets entered a new cycle.
After adding about 12% to the lows of late September, the Dow Jones index moved beyond the corrective pullback, above 61.8% retracement of the amplitude from peak to trough of the first three quarters of this year.
The Nasdaq-100 started the retreat earlier (in November 2021) and has lost more (37.7% from the peak to the bottom and is now -34% below its all-time high), right now near its October start levels. The losing streak continues here, like the 2000-2002 episode.
In the stock indices momentum, it might look like the gap between the Dow Jones and the Nasdaq-100 is closing through a more substantial rise of the former and an apathy or even a further decline of the latter.
The Nasdaq-100 started the retreat earlier (in November 2021) and has lost more (37.7% from the peak to the bottom and is now -34% below its all-time high), right now near its October start levels. The losing streak continues here, like the 2000-2002 episode.
In the stock indices momentum, it might look like the gap between the Dow Jones and the Nasdaq-100 is closing through a more substantial rise of the former and an apathy or even a further decline of the latter.
In the worst-case scenario for the Nasdaq-100, it would return to the 8000 area, mimicking the complete reversion to the mega-rally starting point as it did in 2002 and completing the "Head & Shoulders" pattern.
However, in our view, a more likely scenario is that the Nasdaq-100 will flat or "stumble" in the coming quarters on the back of a brisk march of the Dow Jones, which could return to all-time highs as early as the first quarter of next year.
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However, in our view, a more likely scenario is that the Nasdaq-100 will flat or "stumble" in the coming quarters on the back of a brisk march of the Dow Jones, which could return to all-time highs as early as the first quarter of next year.
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