US earnings season and French elections to drive investor sentiment in Q2

Central bank rate decisions and inflation headwinds will also continue to drive stock market pricing action

Traders at the New York Stock Exchange. Global stock markets are expected to remain volatile amid central bank rate decisions and inflationary data. AP

It’s another big week in markets as a combination of new and recurring themes are expected to continue to drive volatility in the second quarter.

New themes include the start of earnings season in the US and the upcoming French elections, which will bring fresh impetus to markets.

Meanwhile, first-quarter themes such as central bank rate decisions and inflationary data will continue to be a main driver in pricing action during this quarter.

This week saw the release of the all-important US inflation figures on Tuesday, while UK inflation numbers will be released on Wednesday.

Inflation and the US Federal Reserve’s sensitivity to further price pressures will continue to drive stock pricing. Investors expect the Fed to maintain its hawkish stance and stick to the path of increasing interest rates more aggressively this year, especially if inflation continues to surge in the US.

The Reserve Bank of New Zealand, the Bank of Canada (BoC) and the European Central Bank (ECB) will announce their interest rate decisions this week.

The headline will be the BoC’s rate decision on Wednesday. The expectation is that it will increase rates but this time we can expect it to double the rate of increase.

The forecasts are for an increase of 0.5 per cent, taking the overall interest rate to 1 per cent. If this materialises, the Canadian dollar will come in for a nice bout of strength.

The ECB’s interest rate decision follows on Thursday. At present, markets are not positioning for an increase as the ECB maintained in its previous statement that the requirements for raising interest rates have been fulfilled.

The euro has come under pressure against its major counterparts. Slowing growth and inflationary threats in the euro-area, coupled with the continuing Russia-Ukraine crisis, are weighing heavily on the common currency.

Add to this another key emerging theme — the French elections — and it could become a very bumpy ride for euro bulls.

While incumbent President Emmanuel Macron won the first-round ballet against Marine Le Pen on Sunday, opinion polls suggest that the presidential run-off is much closer than expected.

The EUR/USD has not taken much confidence from Mr Macron's first-round win and it is expected to remain under pressure until the climax of the run-off, which culminates with a second round of voting on April 24.

In the commodities market, oil prices moved below $100 a barrel last week as a significant emergency release announced by the International Energy Agency weighed heavily on prices.

The recent gains for oil will remain capped as a combination of resurgent Covid-19 cases in China, global economic slowdown concerns and more hawkish central banks keep prices in check.

Gold has continued to consolidate at $1,920 an ounce.

With the bulk of the central banks’ interest rate decisions already priced in, keep an eye out for inflationary data.

If we continue to see higher inflationary prints in developed economies, the current bull run in the precious metal will persist in the interim.

Finally, earnings season is set to kick off with banking giants JP Morgan, Goldman Sachs, Bank of America and Citigroup all reporting this week.

It will be interesting to note the continuation of the current cyclical rotation in US stocks.

The build-up of positions in tech and communication stocks at the onset of the coronavirus pandemic in 2020 continues to be unwound. This theme is set to remain as losses on the Nasdaq outpace the S&P 500 and Dow Jones, which is seemingly the most resilient.

This trend shows that American equity traders are continuing their pivot from tech-heavy stocks into more traditional industries such as energy, industrials and financials. Expect this rotation to persist.

The more hawkish Fed has also affected US Treasuries. Last week, the benchmark 10-year US Treasury yield inched past 2.7 per cent for the first time in three years.

Higher borrowing costs will also continue to weigh heavily on tech stocks and on the broader stock market in general as investors look to higher Treasury yields.

Gaurav Kashyap is risk manager at Equiti Securities Currencies Brokers. The views and opinions expressed in this article are those of the author and do not reflect the views of Equiti Securities Currencies Brokers