Esperio: Why Good or Bad News May Work Out in the Same Way

The high season of Q2 corporate reports has started with PepsiCo and Delta AirLines, who are the first large companies to share their financial results and will be followed by JPMorgan & Chase and Morgan Stanley.

Banking financial results usually sheds more light on the resilience of a range of companies to the expectations of the rising cost of borrowed money that has already been engineered by the U.S. Federal Reserve (Fed) this spring. Although, perhaps, even if revenues and earnings’ numbers turn out to be strong over the past period, uncertainty surrounding the prospects for the second half of the year could leave the investment sentiment as clear as mud.

Stocks and the currency market’s response to the U.S. labour set of data is shown to be unconventional. Indeed, whether the values of non-farm payrolls and wages are good or not, they are increasing demand for the U.S. Dollar and Treasury bonds.

Why is this happening? The logic seems nearly indisputable. A lot of newly created jobs seem to confirm the strength of the American economy. This delusion has been slipping through fingers for months, yet officials from the Fed and the U.S. Treasury are constantly focused on this real or imaginary power in their public interviews. If any set of economic data would actually remind policy makers of the reality of real strong numbers, then the U.S. financial authorities would immediately feel their hands free to experiment more with the global economy.

Esperio analysts suggest that raising the target range of the Fed’s fund rates by three quarters of a percent at the end of July could be considered as settled, and it will directly influence the pace of the rise of bond yields. In turn, this always favours increased demand on guaranteed-income assets nominated in the currency with higher interest rate, i.e. U.S. Dollar in this context.

In particular, the single European currency, which has been fairly beaten by the consequences of the energy crisis together with the slow motion by the European Central Bank, may be forced to gradually move to the levels below parity with its American counterpart. The Cable, affected by the government crisis on the British Isles, may also be involved in new sell-offs. Currencies like the Loonie and the Aussie are still holding up well, but their exchange rate is heavily dependent on the price development of fuel and other commodities, which are increasingly prone to recession fears.

Weak U.S. jobs data is currently indicating to the inclination that a recession is on its way, sooner rather than later, which again may generate additional demand for safe-haven assets, including His Majesty the U.S. Dollar, which will take the lead. Market indices would exercise pressure either by the recession, or by the Fed’s very high interest rates, so there would be little choice remaining. Some giant tech stocks, however, may also be in demand and shield the economy a recession, especially if good corporate news is released.

MetaPlatforms added almost 1,5% on July 6 after Facebook’s owner announced its new login system for the virtual reality headsets, allowing it to preserve links to social connections there. Integration of existing social connections from Facebook, Instagram or Messenger into virtual reality experiences helps to control device-level access and manage app purchases, which would be great for the ad business. The company's new "Meta accounts" will begin in August, CEO Mark Zuckerberg said in his Facebook post.

Alex Boltyan, senior analyst of Esperio company