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Week Ahead: Equity Gains To Resume On Blowout Earnings; Dollar To Head Higher

By Investing.com (Pinchas Cohen/Investing.com)Market OverviewMay 02, 2021 07:57AM ET
www.investing.com/analysis/week-ahead-equity-gains-to-resume-on-blowout-earnings-dollar-to-head-higher-200576915
Week Ahead: Equity Gains To Resume On Blowout Earnings; Dollar To Head Higher
By Investing.com (Pinchas Cohen/Investing.com)   |  May 02, 2021 07:57AM ET
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  • Largest monthly increase in US personal incomes on record 
  • Fed’s Kaplan calling to consider tapering QE earlier than expected

Forecasts for earnings growth during the current reporting season have almost doubled, to 46% from 24% predicted at the start of April. Of the companies reporting, 87% have beaten earnings expectations on an EPS basis, putting the current quarter on course for the most beats on record, at least since Refinitiv—the source for the above statistics—began tracking the data since 1994.

As such, equity markets appear positioned to move higher in the week ahead.

On Friday, however, most US stocks on the Dow Jones, S&P 500, NASDAQ and Russell 2000 retreated from all-time highs after economic data signaled inflation was on the rise. Compounding market worries, Dallas Fed President Robert Kaplan said it was time to begin "the conversation about reducing central bank support for the economy."

The dollar vaulted higher.

Excess Risk Taking; Reflation Trade Steps Back

In Kaplan's view, expressed during virtual remarks on Friday, there are clear signs of excess risk-taking occurring in the market. He sees that as the cue for the Federal Reserve to begin considering tapering its $120 billion monthly bond buying. Kaplan, "reiterated his expectation that the Fed will need to start raising interest rates next year, more than a year earlier than most of his Fed colleagues anticipate."

The S&P 500 pared its biggest monthly gain since November, after US personal incomes, in March, enjoyed the largest monthly increase on record thanks to stimulus checks. Data for this measure has been compiled since 1946.

As well, the Fed’s key gauge of consumer prices, the “personal consumption expenditure price index,” climbed 2.3% YoY, its steepest advance since 2018.

It’s important to remember that these extraordinary economic results look remarkable only because they are being compared to a year ago when the economy was at a standstill due to the rapidly spreading coronavirus pandemic. We made a similar point at that time as well, noting the inconceivable data produced after the March 2020 bottom. We were dismissive, as well, about the market's rapid climb after the event.

We'll admit, however, that we were wrong. What followed were the best returns in decades.

Will the same thing happen now?

We can't, of course, know. Credit Suisse’s Jonathan Golub increased his target for the SPX from 4,300 to 4,600, as earnings are too good to ignore. On the other hand, Aberdeen Standard Investment's head of North American equities, Ralph Basset, thinks the optimism is largely priced-in and high valuations are maxing out. Finally, JPMorgan Chase has advised traders to prepare for a reflation comeback as the economic reopening accelerates.

Still, on Friday, the reflation trade took a step back. Energy dropped 2.5%, underperforming all other sectors. Another laggard as the trading week came to a close—the Russell 2000, which has represented value stocks due to the small cap domestic business listed on the index that have suffered during lockdown.

Yields, including for the 10-year Treasury benchmark, rose for the week, snapping a three week decline. 

UST 10Y Daily
UST 10Y Daily

But rates fell on Friday, dropping from the extended neckline of the top, showing resistance for the third straight day, as the price fell below the 50 DMA.

The dollar surged, rising 0.8%, the most for the global reserve currency in more than two months, since Feb. 26.

While yields fell, the dollar jumped for a second day, for the first time since Mar. 30, as traders covered shorts after Fed Kaplan's call for a discussion on slowing purchasing to reduce liquidity. In addition, the US economic rebound is outpacing that of other countries, which is sure to attract foreign investment—likely boosting the greenback going forward. Finally, traders rebalanced portfolios at the end of the month.

Dollar Daily
Dollar Daily

Technically, the dollar rebounded off the uptrend line since the Jan. 6 low. The USD suffered the worst monthly selloff since December after completing a rising wedge. However, we have been waiting to see the price find support by the uptrend line, extending out of a massive falling channel since the 2020 peak, which we have been expecting will drive the dollar to retest the Mar. 31 peak, before it heads back toward the 2020 peak.

Gold slumped for the second day in a mirror image of the dollar’s advance.

Gold Daily
Gold Daily

While gold declined on strong US data, it has been developing a falling flag, bullish after the preceding jump, from an earlier bullish flag, that helped the price complete a short-term bottom.

Note, the yellow metal found support by the neckline of the double-bottom, coinciding with the previous low of Feb. 19. An upside breakout would signal a resumption of the upside corrective rally to retest the falling channel’s top.

Bitcoin dipped slightly on Saturday, after closing at the session high on Friday, even after Charlie Munger, Berkshire Hathaway's (NYSE:BRKa) Vice Chairman characterized the cryptocurrency as “disgusting and contrary to the interest of civilization."  He added:

“I don’t welcome a currency that’s so useful to kidnappers and extortionists and so forth, nor do I like just shuffling out of your extra billions of billions of dollars to somebody who just invented a new financial product out of thin air.”

Meanwhile,Ethereum scored a new all-time high on Saturday, pushing above $2,900. The number-two digital currency by market cap has quadrupled thus far in 2021, leaping 290%, while Bitcoin “only” doubled.

Oil fell on Friday.

Oil Daily
Oil Daily

WTI still found support above the ascending triangle that it blew out of on Thursday. The price may have declined upon hitting the rising channel top, but after the bearish pattern failed, it is expected to become a bullish pattern.

Week Ahead

All times listed are EDT

Monday

Markets will be closed in the UK, Japan and Russia for holidays

3:55: Germany – Manufacturing PMI: anticipated to remain flat at 66.4.

10:00: US – ISM Manufacturing PMI: seen to edge higher to 65.0 from 64.7.

21:45: China  – Caixin Manufacturing PMI: likely to crawl up to 50.8 from 50.6.

Tuesday

00:30: Australia – RBA Interest Rate Decision: expected to remain steady at 0.10%.

4:30: UK – Manufacturing PMI: to rise to 60.7 from 58.9.

Wednesday

8:15: US – ADP Nonfarm Employment Change: predicted to rise to 815K from 517K previously.

10:00: US – ISM Non-Manufacturing PMI: to rise to 64.3 from 63.7.

10:30: US – Crude Oil Inventories: previously printed at 0.090M bbl.

Thursday

4:30: UK – Services PMI: seen to rise to 60.1 from 56.3.

7:00: UK – BoE Interest Rate Decision: anticipated to remain at 0.10%.

Friday

4:30: UK – Construction PMI: predicted to advance to 62.5 from 61.7.

8:30: US – Nonfarm Payrolls: forecast to expand to 978K from 916K.

8:30: US – Unemployment Rate: likely to shrink to 5.7% from 6%.

8:30: Canada – Employment Change: expected to plummet to -187.5K from 301.1K.

10:00: Canada – Ivey PMI: expected to fall to 60.5 from 72.9.

 

Week Ahead: Equity Gains To Resume On Blowout Earnings; Dollar To Head Higher
 

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Week Ahead: Equity Gains To Resume On Blowout Earnings; Dollar To Head Higher

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Comments (9)
Hape Fritt
Hape Fritt May 02, 2021 8:46PM ET
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to chucky at Bershire. Keep hating on crypto old man at your own loss. I dislike alot about the 21st century too, but it is not thin air currency used only by kidnappers and extortionists. shamefully ignorant comment that is. nice writeup as always though .PC
Pinchas Cohen
Pinchas Cohen May 02, 2021 8:46PM ET
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Thanks, Hape
King Tolba
King Tolba May 02, 2021 1:09PM ET
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It is a fatal and dangerous mistake for any analyst to say that the American economy has recovered because the economy based on printing trillions of dollars and mired in debt is nothing but a fictitious economy, and any recovery will also be illusory, because what was built on falsehood is also false.
King Tolba
King Tolba May 02, 2021 1:03PM ET
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Really it's very interesting subject. I have a very important question. If taxax rising until 39% Federal Reserve will stopped rising of yield 10 years or not. If not that's mean that Federal Reserve will giving the extension of new money taxax to manipulation of yield 10 years to continue destroy our money and our life.can you answer me please how come silver and gold will rising in this dirty situation. I was stuck because I was Buy physical gold at price very hay 1908$ I having a big problem now. can you advice me please.
King Tolba
King Tolba May 02, 2021 1:00PM ET
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We live in a time of economic bullying. The failed US Federal Reserve raised diabolical bond yields to suppress gold despite the collapse of the dollar. But the Federal Reserve is manipulating the market and wanting to destroy our gold and our money. The US Federal Reserve has descended into an intellectual decline. America's problems are completely over, but they have one enemy, which is gold. Unfortunate thing. Why raise the devil bonds yield? It can't make a strong dollar. They are just fighting gold in an unjustified way. Look at the Dollar Index is down 400 basis points and Gold has fallen as well. Because the US Federal Reserve is only fighting gold. He could not raise the price of the dollar, so why would gold fight? Only the US Federal Reserve is floundering because the US economy is collapsing.
Joseph Guerriero
Joseph Guerriero May 02, 2021 10:41AM ET
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Too much money being artificially pumped into the economy. Biden’s proposed spending will create an inflationary catastrophy. Markets beware. It’s coming.
Imen Tugsjargal
Imen Tugsjargal May 02, 2021 9:32AM ET
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hello pls help me i dontnow
michael engel
michael engel May 02, 2021 9:27AM ET
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Market makers are optimistic, but the state of the union was a morgue. SPX weekly May 3 might be DM #9. Apr 19 is an inside bar, a hanging man at the top. May 3 or May 10 new all time high might be followed by large supply bars.
Sartaj Alam
Sartaj Alam May 02, 2021 9:05AM ET
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Sartaj Aalam
Kevin McCarthy
Kevin McCarthy May 02, 2021 8:58AM ET
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please explain how the dollar effects gold. DXY doesn't even account for all currencies, let alone any asset. In gold, this was plain and simply Hedge Funds pushing the price where they want it. gold ignored the dollar on its decline and followed bonds in lockstep up an down. suddenly stops following bonds upwards, and the only thing you mention is a declining dollar? what about the record reverse repo on Tuesday? not a single article about that. or as I said, gold magically not following the bonds all of a sudden, an instead flowing an index of all inflated currencies without taking that inflation into account. are market participants really this naive?
Jal Mayuak Pathod
Jal Mayuak Pathod May 02, 2021 8:58AM ET
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How are you doing today
Pinchas Cohen
Pinchas Cohen May 02, 2021 8:58AM ET
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Kevin,  DXY and gold possess a negative correlation, as gold is priced by the dollar, gold does not yield and while the dollar is seen to benefit from a reopening economy and the reflation trade, gold will not. Like any other correlated assets, they decouple and recouple as different market drivers shift. Gold posesses a positive correlation with bonds, as they both go up on risk-off and the outlook for low rates. The record repos are to add liquity to the financial system, which should boost gold. However, timing is tricky. Enters technicals - which don't only address timing, but that is its strong point. The technicials are also drivers, which can be a driver that temporarily decoupled gold from its negaitve yield correlation.
Pinchas Cohen
Pinchas Cohen May 02, 2021 8:58AM ET
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About inflation, it's a funny thing. Gold is traditionally an inflation hedge. Therefore, an outlook for rising inflation should boost gold, but these are not traditional times. We are knee deep in QE which didn't allow for inflation. Now, inflation, it's argued, may be a positive development, that would herals in economic growth.
PIERA MWANIKI
PIERA MWANIKI May 02, 2021 8:58AM ET
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Intermarket analysis
 
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