The week Ahead: Yen, UK and Tech earnings along with Fed meeting to fuel market sentiment

By Kathleen Brooks, research director at XTB .com 

What a morning for the yen. After a sharp rally on the back of the Bank of Japan meeting on Friday, USD/JPY surged to 160.00, however, it has since dropped back to 156.00, which suggests official intervention to stem yen weakness. USD/JPY is currently bouncing off its lows as we move through Monday morning. We expect volatility in the yen to persist, as the market tests the BOJ’s resolve to weaken the currency. However, this has not knocked overall risk sentiment, and stocks are expected to open higher later on Monday.

Global risk sentiment came back with a bang last week, and European, Asian and US markets were a sea of green. The S&P 500 gained 2.6%, the Nasdaq was up more than 4% as tech rallied steeply. However, it wasn’t just tech that powered ahead, the FTSE 100, which is a tech-light index, also rallied strongly, and it made another record high on Friday. A record high weekly close is bullish for this index, however, a spate of UK blue chips will release earnings this week, which could test sentiment towards the UK index.

Hang Seng is global outperformer

The major outperformer was the Hang Seng, which registered an 8% gain last week, its best weekly performance for years. Foreign fund purchases are fueling some of this upside, with a record 33.4bn yuan of foreign purchases on Friday. The driver of the Hang Seng’s rally is two-fold: firstly, an improvement in Chinese economic data and secondly, a move away from US equities, as some investors worry that valuations are stretched. There could also be an FX factor that is driving flows into the Hang Seng. Onshore Chinese buyers are also rushing into the Hong Kong exchange as the value of the yuan plunges. There is some concern that the Chinese authorities may de-value the yuan after the recent surge in the dollar. The Chinese government is also trying to encourage fund flows into Hong Kong’s equity markets. Thus, the combination of cheap valuations, the risk of a yuan devaluation and government support is a powerful trifecta of support, and we may see further upside.

AI: show us the money

The US equity markets rallied broadly at the end of last week, although tech was the major outperformer. This earnings season is getting interesting, it is no longer a blanket ‘buy AI theme’. It’s now about who can generate profit quickest from AI. So far, Google and Microsoft are winning that race. Even though both companies reported record levels of capital spending for Q1, their upbeat future revenue forecasts justified the spend. This is why Google and Microsoft rallied 10% and 1.8% on Friday, compared with the dismal performance of Meta last week. Its share price plunged nearly 10% in the last 5 trading sessions. The global tech sector is engaging in a rare, coordinated infrastructure kit-out and this is driving the move into AI hardware producers like Super Micro Computers and Nvidia. The surge in capex spending at Google and Microsoft bodes well for Nvidia’s earnings report later this quarter, as it makes up 98% of the global GPU market. This is why, although Nvidia has rallied another 15% in the last week, and is higher by 77% so far this year, it does not look overvalued, with a forward 12-month P/E ratio of 35 times earnings.

Eli Lily earnings: the bar is lowered

Some key earnings releases this week could determine if the S&P 500, which is less than 3% away from its record high, can continue to extend gains. Coca-Cola, McDonalds, Yum Brands and PayPal could be useful gauges of US consumer sentiment, as inflation rears its head once more. However, the focus will be on healthcare giant Eli Lily on Tuesday, as we wait for an update on sales of its weight loss drug. Obesity drugs are the AI of the healthcare world, and Eli Lily is expected to report revenues of $8.9bn for Q1, with EPS of $2.43. It’s worth noting that analysts have revised down their estimates for Eli Lily in the last 4 weeks.

Can big tech earnings sustain last week’s rally?

Apple and Amazon will also be worth watching. The Magnificent 7 stocks have diverged recently, with Nvidia surging ahead and Meta nose diving. Apple is the biggest underperformer on a relative basis this year, even below Tesla after the EV maker’s strong run last week. Thus, can Apple earnings boost the tech laggard? Analysts have revised down their expectations for Apple earnings for Q1. We already know that iPhone sales in China have plunged and revenue is set to come in at $90.2 billion last quarter, with EPS at $1.50. This compares with EPS of $2.18 for Q4, and revenues of $119bn last quarter. Thus, the market may not be impressed with Apple’s figures going backwards.

Amazon will also report results. Revenue is expected to be $142bn for Q1, with EPS at $1.18. Amazon is also expected to report worse results than last quarter. Unless Amazon and Apple can pull a rabbit out of a hat this week, then their shares may take a hit if they do not perform well in Q1 or give a decent forecast for future profits and growth.

UK earnings in focus as FTSE 100 at record high

In the UK, HSBC, GlaxoSmithKline, Standard Chartered and Shell will report results. The market will want to see if HSBC and Standard Chartered can follow Barclays and deliver decent net interest income. Shell will also be in focus as the price of Brent rallied strongly in Q1. Analysts are expecting revenues of $82bn, net income of $6.25bn and EPS of $0.95, the latter two figures are below the previous quarter. However, the Q1 surge in commodity prices could be underestimated by analysts, if so, then Shell could be in demand later this week.

ECO watch

It's also a busy week for economic data. In the US, there are ISM reports for April, an FOMC rate decision and finally jobs data along with wage growth and the unemployment rate. Economists are currently forecasting 250k gain for payrolls for April, which is a robust number, but is down from 303k in March, and the unemployment rate is expected to remain stable at 3.8%.

Fed meeting: rate cuts get pushed further into future

The focus for global market sentiment is the Fed meeting. The market is not expecting any change in rates this week, and the focus will be on the statement and the press conference afterwards. The market is now not expecting the first rate cut until December, with only 1 cut expected this year. The sharp rise in Q1’s core PCE report saw hopes of an earlier Fed rate cut slip away. The cumulative effect of rising monthly price gauges are probably enough for the Fed to perform a hawkish pivot, with Fed chair Jerome Powell clarifying if a rate cut could even be pushed out to next year. Ironically, the 2023/ 24 stock market rally boosted by Fed rate cut hopes has been blamed for the pickup in inflation, so it will be interesting to hear what Powell and co. have to say about the stock market at this week’s meeting. It seems like the last mile will be the hardest for the Fed when it comes to bringing down inflation. However, for now, the Fed does not seem to want to signal a full pivot towards hiking rates once more. However, if we see more signs that inflation is picking up, that pivot of all pivots cannot be ruled out.

USD strength: will China devalue the yuan?

The Fed meeting will also be critical for the dollar. The greenback is the best performing currency of the year so far in the G10 FX space, and against emerging market currencies. The yen is one of the worst performing currencies in the world this year, it is down 11% YTD vs. the USD, which is worse than the Turkish lira’s 9% dive vs. the USD. After the BOJ kept interest rates unchanged on Friday, USD/JPY rallied to 160.00 before falling back in a sign of official intervention. Although the BOJ did not sound overly concerned about the yen’s decline at the end of last week, we think that it could intervene once more. The weakness in the yen is also impacting other currencies in the Asian region. There has been some talk of a devaluation of the yuan by the Chinese authorities to keep Chinese exports competitive, so expect volatility in the FX space this week.

Will the PM call a UK general election?

The pound and the euro both managed to make gains vs. the USD last week. Eurozone CPI and GDP on Tuesday are worth watching as they could give us a steer about whether a June rate cut is feasible from the ECB. If the market thinks it is, then the euro may weaken vs. the USD as the rate differential rises again. In the UK, money supply, mortgage approvals and Nationwide House prices are worth watching. There are also rumours swirling that the UK Prime Minister could announce a date for the general election this week. While we don’t think that this will have a long-term effect on markets, UK domestically focused indices tend to rally in the months leading up to a general election, before struggling in the weeks leading up to the vote itself. Thus, the announcement of an election in 6 weeks may trigger some volatility in the FSTE 250 and 350 indices. 

XTB CY-RISK DECLARATION: CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 78% of retail investor accounts lose money when trading CFDs with this provider. You should consider whether you understand how CFDs work and whether you can afford to take the high risk of losing your money.

XTB UK-RISK DECLARATION: CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 77% of retail investor accounts lose money when trading CFDs with XTB Limited UK. You should consider whether you understand how CFDs work and whether you can afford to take the high risk of losing your money.

XTB is a trademark of XTB Group. XTB Group includes but is not limited to following entities:

X-Trade Brokers DM SA is authorised and regulated by the Komisja Nadzoru Finansowego (KNF) in Poland

XTB Limited (UK) is authorised and regulated by the Financial Conduct Authority in United Kingdom (License No. FRN 522157)

XTB Limited (CY) is authorized and regulated by the Cyprus Securities and Exchange Commission in Cyprus. (License No.169/12)

Clients who opened an account from the 1st of January 2021 and are not residing in the UK, are clients of XTB Limited CY.