Daily Market Comment – Earnings season kicks into top gear

  • All quiet on the FX front, traders sidelined ahead of Fed decision
  • Oil prices reclaim some ground on Russian pipeline shenanigans 
  • Stock markets await crucial earnings from Microsoft and Google

Fed nerves 

It was a relatively calm session in the FX space. The prevailing theme was a slightly softer US dollar, but nothing to write home about. Most currency pairs traded in relatively narrow ranges, without any impactful data releases or news to drive the price action. 

Traders are playing it cautious, hesitant to enter into new positions ahead of what promises to be an explosive week featuring a Fed rate decision, a GDP report that will reveal whether the US economy dodged a technical recession, and a storm of earnings from the tech titans. 

The Fed will have a tricky communications exercise on its hands - it has to balance the need for shock-and-awe rate increases to slay inflation against signs that the economy is already contracting and demand is cooling off at a stunning pace. Every investor is wondering the same thing: exactly what would it take for the Fed to back off? 

As for the almighty dollar, money markets are pricing in a triple-barreled rate increase in September as well, so any hints that the Fed will slow down if the growth outlook worsens might be enough to spark a retracement. That said, recession risks are not unique to the US and as long as every other major economy is struggling even more, safe haven flows are likely to keep the reserve currency in demand, preventing any trend reversal. 

Oil prices bounce back

Energy was the only corner of the market that experienced significant moves. Oil prices staged a sharp comeback, rising more than 5% from their lows yesterday as supply nerves came back to haunt investors after Russia announced that gas flows to Europe through its main pipeline would fall to only 20% of capacity.  

The risk that Russia cuts off the gas completely and paralyzes economic powerhouses like Germany during the winter is hanging like a sword over the euro. Anything is possible but it is fruitful to consider that this is the ‘nuclear’ option for Russia as well. 

Europe imports around 35% of its energy from Russia, yet Russia collects around 70% of its energy revenue from the European Union, and this supply is sent mainly through pipelines that cannot be rerouted to Asia. It would ensure a brutal recession on both sides, hence why Putin didn’t pull the trigger even when Europe was less prepared.  

Earnings season fires up

Over in the equity market, it was a rather uneventful session until the closing bell, when Walmart reported disappointing earnings. The company lowered its profit outlook and warned that soaring food and energy prices have kneecapped consumers, a message that torpedoed the entire retail sector, dragging Amazon down 4% in after hours trading. 

The earnings season will kick into top gear today with Microsoft, Google, Visa, Coca Cola, McDonalds, and many other household names releasing their results. All eyes will be on the guidance for the coming quarter(s) as investors try to gauge whether the problems with Walmart and Snap are isolated to those sectors or signs of broader malaise. 

Since expectations were set so low going into this earnings season, the underlying theme so far has been that the situation is not quite as dire as many feared. If the tech juggernauts fit this profile, the market could breathe a collective sigh of relief.   

Finally, the latest readings on US consumer confidence and new home sales could attract some attention today too. 

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