Market Overview

29 April 2020

Market Doubts in a Future Rally Outweighs Any Fed Meeting's Effects

Mixed Q1 earnings indicators and especially guesswork-style forecasts for the rest of the year, are a characteristic feature of most corporate reports. All three major US stock indexes are now within 20% of their February's record before-coronavirus-era highs looked to be a critical source of all market doubts around the future prospects for share prices.

The benchmark S&P 500 broad market American index is on the edge of achieving its best month's percentage performance since 1987. But this zone around 2900-2930 temporarily resistance can be rightfully called a crossroads at least in terms of technical prospecting since it represents a canonical maximum of 61.8% Fibonacci retracement in the height of February 20 near 3400 and to the seemingly absolute bottom for now near the 2186 zone shown on March 23.

Trillions of Dollars and Euros are an important stimulus driver. Hopes of many market participants that the worst for most companies is over or about to reach its final end, and that the economy and corporate profits would gradually catch up over time in the next couple of years have prompted a lot of investors to buy many unsinkable giant companies shares as a kind of advance pay when these assets were unusually cheap. However, the same people and other potential long-time investors are seriously considering whether it is not too expensive to invest in the stocks of the same companies at current high prices. This logic may prevail at some moment unless these doubts are confidently overcome by the corporate forecasts in reports of several leading companies.

The remaining four of the so-called FAANG group to report this week, includes Google (Alphabet) that was already reported on Tuesday and Facebook - today. The list will be completed by Amazon and Apple tomorrow. The Netflix report was already discussed in detail last week), and, as it was expected, the company's value has temporarily decreased after the report due to the highly overbought market and the predominance of profit-taking.

As for Google, their report showed lower-than-expected earnings per share (EPS) of $9.87 instead of the expert polls average which was at the $10.26 level, which is only a little higher than the similar EPS figure for Q1 2019, but far less than $15.35 per share in Q4 2019. Revenue of $41.16 billion exceeded the figures of any of the first three quarters of 2019 and was only less than $46.08 billion in Q4 2019. Still, Tuesday's trading main session for Google ended at $1,233 per share, which is below Monday's highs and last week near the $1,295 mark. Today's opening of American trading after the release of the report could lift the share prices of the internet giant again, but the final reaction over the next few days may remain less unambiguous and restrained. In an alternative scenario, if prices fall below $1200 than it may become one of the possible "black spots" for other high-tech companies.

In a similar context, the market may perceive any achievements or temporary defeats of other blue chips or on-everyone's-lips companies. In addition to the FAANG group, attention will be drawn to the reports of Microsoft and Tesla today, Twitter and McDonald's on Thursday, as well as possibly to the Gilead Sciences report - which is the manufacturer of remdesivir - after clinical trials of this medication spur a scandal followed by a moderate market correction last week.

The average revenue expectation for the ambitious Tesla is around $6 billion with EPS expectation at -$1.08 according to the Bloomberg expert poll. The time may finally come for the market to find out whether this year's powerful rally in Tesla shares is actually justified. Goldman Sachs just targeted a possible high of $864 for Tesla as Goldman analyst Mark Delaney wrote in his view. Tesla "has a significant lead over other automakers in making electric cars and is expected to maintain a strong market position," he wrote. Electric carmaker's shares have shown strong resilience to the economic and market turmoil so far amid the COVID-19 pandemic. But Tesla shares have a reputation of a very speculative asset, capable of extremely volatile movements.

With all this corporate news and the overall uncertain economic horizon, the US Federal reserve (Fed) meeting is unlikely to add much important food for mediation. All important decisions were already made in March. The majority of experts expect that the American financial regulator will pause to see what is working and what is not. It may be justified if the Fed maintains its Fund rate at 0-0.25% and keeps the bond buying program untouched. The Fed twice urgently lowered the rate in March - the first time by 50 basis points to 1-1.25%, and the second time by 100 basis points to the present near zero levels. Driving the rates below zero is probably not actual for the moment as Fed officials repeated before. All these moves by the Federal Reserve are anticipated by markets. They expect the Fed to confirm its commitment to the already adopted quantitative easing (QE) programs at least until the end of the year and for a longer period as long as such ultra-loose measures are necessary.

The Fed launched a $700 billion asset repurchase program and announced that it would not limit its volume at all. They included corporate bonds buying too in order to supply the companies with longer-term cash. The Fed's overall balance sheet grew by more than $3 trillion during the crisis, reaching a value of more than $6.5 trillion. At the same time, the Treasury Secretary Steve Mnuchin said on Tuesday that the Fed is unlikely to include buying company shares in its easing program. This clearly did not improve the expectations of the stock market, where the volume of company buybacks has decreased significantly during the last two months after the market's viral crash. Any clarification on this matter is expected directly from the Fed's Chairman Jerome Powell as it's considered a structure independent of the Treasury. So, the words of Powell in this regard are likely to be really interesting to the markets.

News on the number of newly detected infectious cases could theoretically contribute to understanding what will happen to the economy although the complete picture, in fact, is clouded as a number of tests in recent days are sharply increased. The markets seem to agree now with the President of the United States Donald Trump, who explained that more than one million detected cases of coronavirus infection in the country were found by a well-functioning infection testing system. He just wrote on Twitter yesterday that other countries conduct fewer tests, so they have far fewer cases of the infection detected. The number of infected cases in the US is far ahead of any other country in the world - in Spain, which is in second place by number of cases, there are about 232,000.

Both American politicians and leaders of other countries, as well as health experts say that a larger testing coverage brings the opening-up of economies closer. The US President added on Twitter today: "Texas to open businesses in phases beginning Friday, great job being done! Many States moving to SAFELY & QUICKLY reopen!". Similar processes are developing in some European countries.

More and more countries are allowing businesses to re-open, but others see reasons to remain cautious, especially as a coronavirus vaccine has yet to be developed and a possible second wave of infections are still on the table for the second half of the year. "We are less optimistic and expect a slower recovery in the world economy," Commonwealth Bank of Australia said in a research note. "The risk of reintroducing restrictions is a risk to market participants' optimistic outlook for a quick resumption of normal economic activity," it added. The consumer demand would be rather depressive for several months at least due to the unemployment jump and anxious behaviour in public places as people would make a difficult choice in favour of avoiding too many visits to public places. Many people will probably try to keep the safe social distancing even after official lifting of the strict quarantine measures by the authorities. Perhaps, a similar set of pros and cons would be taken into account by most of the market participants in the coming days and weeks, so that all these considerations may determine the dynamics of the movement of stock indices and share prices.


Analysis and opinions provided herein are intended solely for informational and educational purposes and don't represent a recommendation or investment advice by TeleTrade.

Lysakov Sergey
Market Focus

Material posted here is solely for information purposes and reliance on this may lead to losses. Past performances are not a reliable indicator of future results. Please read our full disclaimer.

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