All eyes on tech earnings
Summary: Risky assets followed the Fed, pushing higher overnight, and setting a firm positive lead for Asia as the Feds ultra-dovish message crushed yields and propelled stocks and gold higher. The Fed maintaining the mantra to do whatever it takes to support the economy and hinting at further action in preparing for the worst, supporting the return of the perpetually bid growth/momentum trade overnight and green lighting yield hunting behaviour, with little regard for economic realities.
Healthcare and technology stocks the biggest gainers on the ASX 200, again following the dovish signals from the Fed, with rates set to remain low for an extended period. Music to the ears of seemingly infinity bound momentum and growth stocks, with the earnings duration pathways whose valuations are boosted by record low rates set to extend for years to come.
However, the “whatever it takes” boost petering out and US futures trading lower, dollar bid smalls with a slight risk off tone creeping into the afternoon session as investors weighed the ever-mounting COVID-19 toll on the global economy, congressional gridlock on the next stimulus bill and the earnings releases from tech titans, Apple, Amazon and Alphabet tonight. Higher cases in Victoria, Tokyo and record deaths in Texas also injecting a dose of reality into the frenzy precipitated by central bank’s bid to remain accommodative at all costs and detach asset prices from reality. This liquidity induced, frenzied behaviour in full view as Robinhood data shows daytraders stampeding into Kodak stock. According to Robintrack data, around 43,000 Robinhood users have added Kodak to their accounts in some form over the past 24 hours as speculation on virus cures runs rife. At one stage overnight, the stock was up almost 700%.
Although the Fed was the big story overnight, Chairman Powell offered up very few surprises, with no major changes to the policy stance and post meeting statement. However, what was offered was a decisive reiteration of current policy settings and a clear commitment that monetary policy will remain expansionary with Powell’s commentaries remaining as dovish as possible without the addition of new “tools”. Powell whilst stopping short of directly tying forward guidance to a specific outcome, hinted at the readiness to strengthen forward guidance shifting to an outright measure down the track, which would include tying future rate increases explicitly to actual inflation reaching/overshooting 2%. The Fed chair was also keen to emphasise the enormous degree of uncertainty that remains with respect to the economy and tie the path of policy to the pandemic and unknown virus outcomes. Essentially forewarning market participants that the Fed is ready to take further action if necessary, and has plenty of room to manoeuvre should the need arise.
Tonight’s 2Q GDP read is likely to confirm a collapse in the US economy of epic proportions at the hands of the global pandemic. However, although the read will no doubt grab headlines, the data is largely backward looking and with the virus resurgence ruling present outcomes the high frequency data will provide a better read on the state of the US economy. Again overnight the Fed chair was quick to point out that this high frequency data has stalled with the resurgence of the virus and recovery momentum appears to faltering, as we have previously noted.
The true directional focus for risk assets will however most likely come from the mega cap tech earnings. Speculative excesses in technology stocks which have led the charge in the melt up off the March lows have embedded some solid expectations about these companies, which given lofty expectations must be met. With concentration another risk factor, as large cap tech now accounts for almost 40% of the S&P 500, the onus on delivery for broad market sentiment is large.