First quarter earnings will be a key test for the stock market rally

Releases from tech heavyweights, such as Alphabet, Amazon and Apple could stall the rise in equities

The New York Stock Exchange. The Dow Jones index futures contract, set to expire on June 19, is now trading at 24,000 levels, just off this month's highs of 24,323. Reuters

Risk sentiments have improved in the past few weeks with many markets, particularly equity markets, continuing to consolidate. At the time of writing, the Dow Jones index futures contract, set to expire on June 19, was trading at 24,000 levels, which is just off this month's highs of 24,323.

This represents a more than 32 per cent move higher from those 18,000 lows of a month ago. It was a similar picture for the S&P Index, which is now trading just below the 2900 handle, up more than 11 per cent on the month and 32 per cent higher than the March lows.

With a lot of the recent upward momentum derived from central bank easing measures, this week will be a key test of the equity markets. As we enter the first quarter earnings season, watch for a few key releases from tech heavyweights such as Alphabet, Amazon, Apple and Microsoft. Also set to announce are plane maker Boeing and oil and gas company Exxon.

First quarter revenue is expected to be lower when compared to the fourth quarter of last year and keep an eye on the variance in the earnings per share, which are all expected to come in worse. While the US went into lockdown towards the end of the first quarter, the results will no doubt paint a more accurate picture of the economic situation for corporations and should stall some of the recent rises seen in the major US stock indices.

This week also sees the release of the first quarter US gross domestic product data. Quarter-on-quarter growth during the first three months of the year is expected to contract by 4 per cent compared to a year ago. The decline should come as no surprise and there are expectations for a slower contraction in the US than China. The second largest economy showed a drop of 6.8 per cent in their first-quarter growth. Note, however, that the pandemic dominated more of China's first quarter than it did for the US, so expect this data to be another hindrance in the recent US stock market rally.

The other key release for US markets this week will be the US Federal Reserve's rate decision. Perhaps the most critical Federal Open Market Committee meeting in recent memory, markets will keenly wait for Fed chairman Jerome Powell’s comments. The Fed have remained rather tight-lipped since the outbreak, and while I don’t foresee any changes in overall rates, further easing measures could be on the table.

In March, I wrote that the US Dollar Index would consolidate at about 100 and that’s what it has done in April. Further easing measures from the Fed could see some short-term weakness for the dollar, but overall I see the index holding above 100 through the weeks ahead.

The European Central Bank is also announcing rates this week. ECB president Christine Lagarde has already said the eurozone economy could contract by as much as 15 per cent, so expect a bearish press conference on Thursday with more easing measures unveiled. April has not been favourable for euro long positions; the Dubai Gold and Commodities Exchange (DGCX) EUR/USD contract was trading at more than 2 per cent lower on the month. I continue to favour short positions in the euro and expect a move towards as low as $1.0632 before the end of the second quarter.

With the recent risk rally, gold has come off its seven-and-a-half year high, however, gold still remains the safest play along with the US dollar. On March 31, I gave a buy call in the precious metal with a target of $1,703 which was easily filled by April 13. I continue to like long positions in the commodity, and expect another run towards the channel between $1,735 and $1,750 in the next two weeks. Long-term support kicks in between $1,580 and $1,600 levels.

And finally, all eyes will move back to WTI, with the June contract set to expire on May 19. Last week, the May contract famously traded in negative territory – printing as low as minus $37 a barrel – because traders sold off the contract to avoid delivery as a result of storage strains.

With Cushing, Oklahama, the delivery point of the CME’s WTI contract already filled to 70 per cent of capacity, the storage strain will continue to rile crude-long positions leading up to delivery. The largest US crude exchange traded fund, the United States Oil Fund, dumped its June positions this week which has seen the June crude contract move towards $10 a barrel at the time of writing, down more than 64 per cent on the month. Expect further downsides as we move towards the middle of May, with a test of $5 a barrel very much on the cards.

Gaurav Kashyap is a market strategist at Equiti Global Markets. The views and opinions expressed in this article are those of the author and do not reflect the views of Equiti