We knew that yesterday was not going to be a bright day, as Microsoft (NASDAQ:MSFT), Google (NASDAQ:GOOGL) and AMD (NASDAQ:AMD) have all seen a negative market reaction to their fantastic quarterly results that failed to match the huge market expectations. And because most investors have been waiting in ambush for the slightest misstep to take advantage of selling the overstretched tech rally, the tech stocks got hammered after Microsoft’s light guidance for the current quarter. Microsoft fell more than 2.5% from a record high, Google tumbled more than 7%, AMD lost 2.5% and Nvidia (NASDAQ:NVDA) retreated about 2%.
Yesterday’s tech selloff was broadly expected before the session opened. What was not expected however was a surprise Q4 loss at New York Community Bancorp (NYSE:NYCB) – which slashed its dividend following its asset purchases from the bankrupt Signature Bank led to higher loan-loss provisions and charge-offs. The bank also warned of building trouble in the office-space sector. New York Community Bancorp (NASDAQ:CTBI) shares tumbled near 38% yesterday, bringing back the worries regarding the US regional banks, the commercial real estate threat, and the possibility of seeing other small regional players go into trouble. As such, the SPDR® S&P Regional Banking ETF (NYSE:KRE) sold off nearly 6%, and even big banks which have largely benefited from the regional banks’ misfortune last year traded down.
Apple (NASDAQ:AAPL), Amazon (NASDAQ:AMZN), and Facebook’s Meta (NASDAQ:META) will post results after the bell today. They’d better blow investors’ minds. Otherwise, the tech selloff is poised to gather momentum – despite the falling yields.
Speaking of Yields
Resurfacing worries of another potential bank stress sent the US yields tumbling yesterday. The US 2-year yield tipped a toe below 4.20%, and the 10-year yield sank below 4% on a weaker-than-expected ADP report, lower than expected employment cost in Q4, on news that US Treasury will stop increasing the size of its auctions starting from May, and of course on fear that another bank stress could hurt the US growth and get the Federal Reserve (Fed) to hurry up on cutting rates to calm down the market nerves. But we are not there just yet!
The Fed kept its rates unchanged at yesterday’s meeting as expected, they removed the statement that talked about ‘additional policy firming’ and replaced it with ‘rate cuts won’t be appropriate until the committee has gained greater confidence that inflation is moving sustainably toward 2%’.
More importantly, Jay Powell hinted at a slowdown in the pace of QT in the foreseeable future. And that’s a big deal, as unwinding QT will leave the market with more liquidity than otherwise, and all that extra liquidity that is not sucked away could continue to be in the financial markets and support asset prices. In summary, we may not see a rate cut right away, but a slowing QT sounds better for relaxing the financial conditions and asset valuations than your regular rate cuts. What’s sure is that the Fed will never ever be able to pull out the GFC and pandemic liquidity out of the market. Ever. Enjoy.
Coming back to rates, Powell wanted it to be clear to everyone that a rate cut in March is Unlikely. Still, activity on Fed fund futures gives around a 65% chance for a March rate cut as yesterday’s bank worries play in favor of a sooner rather than a later rate cut. But remember, the last time the US went through a decent banking stress, the US economy didn’t slow. Or if did, it still eked out an above-average growth.
In the FX, the US dollar swung between gains and losses yesterday and is slightly above its 200-DMA at the wake of the latest Fed decision. The EUR/USD extended losses to the 1.08 psychological mark as French and German inflation figures were soft enough to keep inflation worries and the European Central Bank (ECB) hawks at bay. With both the ECB and Fed meetings out of the way, the next natural target for the euro bears is the 100-DMA which stands at 1.0775.
Across the Channel, the Bank of England (BoE) will give its latest policy verdict today. British policymakers will likely push back on early rate cut expectations after the latest inflation numbers in the UK revealed a mini U-turn in easing price dynamics. But Brits are expected to deliver a brighter outlook for their economy, lower inflation forecasts and open the door for rate cuts later this year.
The sharp fall in US yields amid the mounting US regional bank worries sent the 10-year gilt yield below the 3.80% level yesterday, but gilts had their worst month since May, the FTSE 100 recorded its first drop since October, and sterling topped at 1.2830 against the greenback. Improved economic forecasts and a balanced hawkish tone should contain the selling pressure in sterling, but Cable is more likely to test 1.25 than 1.30 in the foreseeable future.