- Middle East tensions have eased as neither Israel nor Iran intends to continue with the recent attacks.
- Market participants only expect 41bps of cuts in 2024.
- There is optimism in the market about the upcoming tech earnings reports.
Equities recovered ahead of major US earnings reports on Monday and as Middle East tensions eased. The rebound comes after six sessions of declines caused by a drop in Fed rate cut expectations and geopolitical tensions.
Nasdaq’s losing streak (Source: Bloomberg)
Equities had a rough time last week, with the Nasdaq posting big declines as investors dumped risk assets amid Middle East tensions. There were fears in the market that the conflict between Israel and Iran would escalate. As a result, investors preferred to buy safe-haven assets like gold and the dollar. Meanwhile, equities fell. However, that has now changed, as neither Israel nor Iran intends to continue with the recent attacks. Consequently, tensions have eased significantly, allowing traders to focus on US earnings.
Furthermore, the recent decline in equities came from a shift in the outlook for Fed rate cuts. The outlook has changed significantly with incoming economic data. The US economy has remained resilient despite higher interest rates. At the same time, inflation has stalled above the Fed’s 2% target.
Consequently, policymakers last week were more hawkish about the outlook for interest rates, putting pressure on equities. Powell moved away from his previous dovish outlook for three rate cuts in 2024. Instead, he noted that the recent higher-than-expected economic figures would necessitate higher interest rates for longer.
Equity traders have been betting on a bullish run as the Fed lowers interest rates. Notably, lower borrowing costs allow businesses to perform better, boosting stocks. However, since the outlook has changed, there is less certainty in the market about the timing of the first rate cut. Moreover, market participants only expect 41 bps of cuts in 2024. Investors are now eagerly awaiting the core PCE figures this week for a better picture of the state of inflation. Another upbeat report would further weigh on equities as it would delay Fed rate cuts.
Meanwhile, there is optimism in the market about the upcoming tech earnings reports. As a result, tech stocks like Amazon and Apple rose on Monday. Investors expect reports from major companies this week, including Tesla, Microsoft, and Alphabet. Historically, tech stocks have performed well despite higher interest rates. Therefore, markets are looking forward to these Q1 earnings reports.
