Marketmind: Earnings vs Rates

[October 19, 2022]  (Reuters) - A look at the day ahead in U.S. and global markets from Mike Dolan.

Market tension is building between surprising positivity still coming from the unfolding corporate earnings season and the anxiety in interest rate markets and macro gloom.

A trough-to-peak bounce of between 6-8% in world stocks and on Wall St over the past week - the third such rally since the start of last month - has many investors wondering if the year-long funk in global assets is nearing an end and whether all-pervasive pessimism is overdone.

Exciting the bulls has been forecast-beating third quarter earnings readings from the big U.S. banks, with surging net interest margins showing the flipside of the rates angst and trading revenues lifted by volatile markets.

But it's clearly more than the banks. Shares in Netflix soared 14% after the bell late Tuesday after the streaming giant said it reversed customer losses that had hammered its stock this year and projected more growth ahead.

And in Europe, the region's largest technology company ASML jumped 6% on Wednesday after reporting better-than-expected sales and profit along with record new bookings.

Tesla leads a packed diary of U.S. reports later on Wednesday. U.S. stock futures held recent gains ahead of the open and European bourses were higher.
 

But earnings may be just a rearview mirror of the economy and the inflation and interest rate backdrop showed little sign of improvement across the western economies. U.S. 10- and 30-year bond yields were now both above 4% this week for the first time in 12 years.

And the picture in Britain, the epicentre of recent fiscal policy and bond market quake, remained volatile as data showed UK inflation jumped back above 10% last month - matching the 40-year high hit in July.

Late on Tuesday, the Bank of England scotched reports of a further postponement of its planned balance sheet unwind and said it would indeed start selling some of its huge stock of British government bonds next month - unnerving investors as it also tees up another jumbo interest rate rise.

The only solace was that it would refrain from selling ultra-long bonds at the heart of the recent pension fund blowup and 30-year gilt yields slipped back to two-week lows as a result. The pound retreated again too.

Meanwhile, the Financial Times reported UK banks were braced for a potential windfall tax on profits as the government seeks out new sources of cash to shore up finances.

American flags hang from the facade of the New York Stock Exchange (NYSE) building after the start of Thursday's trading session in Manhattan in New York City, New York, U.S., January 28, 2021. REUTERS/Mike Segar

Energy markets provided better news on the inflation front. Oil prices steadied after Tuesday's slide amid reports U.S. President Joe Biden plans to release more of the Strategic Petroleum Reserve.. The rolling year-on-year rise in Brent crude prices has now almost disappeared for the first time since January 2021.

Elsewhere, Japan's yen continued to plumb 32-year lows ever closer to the psychologically-important 150 per dollar level. Finance Minister Shunichi Suzuki was reported as saying he was checking currency rates "meticulously" and with more frequency and Japan's 10-year government bond yields rose above the Bank of Japan's policy band for the first time in four months ahead of next week's BOJ meeting.

Key developments that should provide more direction to U.S. markets later on Wednesday:

* U.S. Sept housing starts, Federal Reserve issues Beige Book of economic conditions. Canada Sept inflation report

* U.S. corporate earnings: Tesla, IBM, Northern Trust, M&T Bank, Procter & Gamble, Prologis, Lam Research, Equifax, PPG, Kinder Morgan, Abbott Laboratories, Travelers, Citizens Financial, Comerica, Nasdaq, Marketaxess, Baker Hughes, Elevance, Crown Castle.

* U.S. Treasury auctions 20-year bonds

* Minneapolis Fed President Neel Kashkari speaks in Minneapolis, Chicago Fed President Charles Evans speaks in Charlottesville

* Bank of England Deputy Governor Jon Cunliffe, BoE's executive director for markets Andrew Hauser, BoE monetary policymaker Catherine Mann, BoE Deputy Governor for Prudential Regulation Sam Woods, BoE Executive Director of Prudential Policy Directorate Vicky Saporta, BoE external member of Financial Policy Committee Carolyn Wilkins speak in London

(By Mike Dolan; Editing by Susan Fenton and Peter Graff; [e-mail]. Twitter: @reutersMikeD)

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