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Optimistic expectations In the Market for Dovish Fed Pose Risk to Equities

Olusegun Enujowo

Analyst

We see Wall Street trading slightly lower with low volatility and reduced trading volume (in pre-market trading) after the S&P 500 jumped 0.8% on Friday to end the week and even the month positively. A rally led by large cap stocks has helped Wall Street to recover from recent losses - we see the tech heavy Nasdaq 100 currently 0.3% in pre-market. 

Trading volume was reduced today with many major markets closed for a holiday.

Shares of First Republic Bank were halted after plunging again (in pre-market trading). Regulators had been working into the evening hours Sunday in Washington before announcing that JPMorgan had won the bid to take over First Republic as part of a government-led emergency measure. The collapse of First Republic was the second largest bank failure in U.S. history, and while we read that First Republic was "rescued" by JPMorgan written by (financial) journalists, we see a bank failure and a U.S. banking giant swallowing a smaller rival. JPMorgan will benefit from the acquisition, but concerns about the health of regional banks will remain.

Main focus this week will be on interest rate decisions. The Fed is widely expected to hike by another 25 basis points - same with the ECB. However, investors are very optimistic that the Fed will announce the end of tightening cycle and point towards rate cuts that start in Q3. I believe that is widely too optimistic - also the ECB will keep a hawkish rhetoric. Both the Fed and ECB will try to avoid a dovish signal that significantly increases the risk of inflation to become more entrenched. 

We are also in another busy week of earnings reports - including Apple and AMD. HSBC in Asia, and German auto giant Volkswagen, as well as Europeans oil & gas behemoths BP and Shell.

Commodity prices remain pressured from rising signs of slowing economies. Gold remains near key-level $2,000 and continues to benefit from the dovish hopes/expectations of investors.

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