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Earnings Should Bring Normality

By MarketPulse (Craig Erlam)Market OverviewJan 13, 2022 11:13AM ET
www.investing.com/analysis/earnings-should-bring-normality-200614655
Earnings Should Bring Normality
By MarketPulse (Craig Erlam)   |  Jan 13, 2022 11:13AM ET
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It’s been a rollercoaster start to the year, and as we head into earnings season, it’s hard to say exactly where investors stand.

Blocking out the January noise is one thing, but it’s made far more complicated by Omicron, inflation, and the rapid evolution of monetary policy. Yesterday’s reaction to the inflation data was a case in point. The data mostly exceeded expectations, albeit marginally, while headline inflation was a near 40-year high of 7%. And yet the response was broadly positive.

I get that traders perhaps feared the worst, and, as I’ve referenced before, it does feel like markets are at peak fear on US monetary policy, which could make relief rallies more likely. But there is also underlying anxiety in the markets that could make for some volatility in price action for the foreseeable future.

The fourth quarter is expected to have been another strong quarter, although the emergence of Omicron will likely have impacted many companies during the critical holiday period. Perhaps earnings season will bring some welcome normality to the markets after a period of fear, relief, and speculation. Of course, as we’ve seen throughout the pandemic, that will likely have been to the benefit of others.

And while earnings season will provide a distraction, it is happening against an uncertain backdrop for interest rates and inflation which will keep investors on their toes. It does seem that investors are on the edge of what they will tolerate, and it won’t take much to push them over the edge, which will be fine if we are near the peak of inflation, as many expect.

The data today looks a mixed bag on the face of it, with jobless claims coming in a little higher than expected, which may be down to seasonal adjustments. The overall trend remains positive and points to a tight labor market. 

On the other hand, the PPI data will be welcomed, with the headline number slipping to 0.2% month on month. Perhaps a sign of supply-side pressures finally starting to decrease, which will come as a relief after inflation hit a near-40 year high last month.

Sterling Solid As Pressure Mounts On Boris

It seems impossible to ignore the political soap opera currently taking place in the UK, with Prime Minister Boris Johnson once again in the public firing line after finally admitting to attending an office party in May 2020.

In other circumstances, uncertainty around the top job in the country could bring pressure in the markets, but the GBP/USD is performing very well. Perhaps that’s a reflection of the controversy that forever surrounds Boris, and we’re all therefore numb to it, or a sign of the environment we’re in that the PM being a resignation risk is further down the list when compared with inflation, interest rates, Omicron, energy prices, etc.

Can bitcoin break key resistance?

Bitcoin is enjoying some relief along with other risk assets and has recaptured $44,000, only a few days after briefly dipping below $40,000. That swift 10% rebound is nothing by bitcoin standards, and if it can break $45,500, we could see another sharp move higher as belief starts to grow that the worst of the rout is behind it. It looks like a fragile rebound at the moment, but a break of that resistance could change that.

Earnings Should Bring Normality
 

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Earnings Should Bring Normality

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Peter ONeill
Peter ONeill Jan 13, 2022 6:59PM ET
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I honestly cannot see stock markets return to 'normal' until money supply / Fed QE still swirling around falls significantly (which could take 24+ months with a lot of bumps along the way). The money supply is still 38% - 40% above normal levels and ironically so are PE Ratios about 35-40% above long-term averages. Until fed stimulus is removed from the market via interest rate hikes and the Fed reduces its balance sheet significantly - the market will remain about 35% overvalued. Every dip will be bought regardless of the news / risk-reward as so much money floating around trying to find a home to hide from inflation. The current USA stock market has all the hallmarks of an overvalued artificially high bubble, now facing interest rate hikes and inflation. This is why most brokers are telling clients to diversify any portfolio into better 'value' emerging markets or developed Asian / EU markets instead (or carefully invest in individual shares versus broad ETF / Indexes).
 
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