Big Tech earnings, led by Alphabet and Microsoft, boosted US stock futures on Tuesday evening. Dow Jones Industrial Average futures gained 0.1%, S&P 500 futures added 0.4%, and Nasdaq 100 futures increased by 1.2%. Microsoft beat Wall Street’s expectations in its latest quarter and posted strong revenue from its Intelligent Cloud business segment, driving shares up by 8%. Meanwhile, Google’s parent company Alphabet reported better-than-expected revenue and a profit in its cloud business for the first time, causing shares to rise by over 2%.
However, regular trading on Tuesday saw the Dow fall by 1%, the S&P 500 finish 1.6% lower, and the Nasdaq Composite dropping nearly 2%. This was partly due to First Republic Bank reporting a 40% decrease in deposits to $104.5 billion in the first quarter, which reignited concerns about the broader banking sector and put pressure on the major averages.
Investors will continue to monitor earnings results from travel companies such as Boeing, Hilton Worldwide, Spirit Airlines, and Travel + Leisure before the bell on Wednesday. Additionally, durable goods and mortgage purchase data will be released on Wednesday morning, followed by the latest GDP update on Thursday and the Personal Consumption Expenditures Price Index – the Fed’s preferred inflation gauge – on Friday.
On Tuesday, all sectors of the stock market experienced a price drop, with the biggest losers being the information technology and materials sectors, down 2.09% and 2.15%, respectively. The consumer discretionary sector also suffered a significant drop of 2.05%, while the utilities and consumer staples sectors fared slightly better with only a 0.10% and 0.12% decline, respectively.
The decline was driven by a combination of economic and geopolitical risks, including concerns about central banks’ inflation fights, as well as uncertainty surrounding the ongoing banking crisis. The financials sector was among the hardest hit, down 1.76%, as investors worried about the potential impact of the crisis on the broader banking sector.
Major Pair Movement
Investors across markets and regions experienced a bleak day as a multitude of economic and geopolitical risks caused them to seek refuge in the US dollar and yen. Central banks’ fights against inflation were seen as contributing to the growing risks that investors were concerned about.
First Republic Bank’s quarterly report, released on Monday, caused alarm in the markets, revealing the precarious state of the bank after March’s banking crisis. Investors are now speculating on the possibility of the acute phase of the banking crisis turning into a chronic issue, with the Federal Reserve nearing the end of its aggressive rate-hiking cycle amid an increased risk of a recession.
This flight to safety was reflected in the 20 basis point drop in the 2-year Treasury yield and a 39 basis point surge in one-month T-bill rates. Investors were pricing in 70 basis points of rate cuts before year-end, with a 25 basis point hike next week slightly less favored. In addition, the 5-year U.S. sovereign CDS soared to its highest level since 2011, now above Spain’s, as the debt ceiling remained unresolved.
EUR/USD decreased by 0.64% as investors moved their funds to the safe-haven dollar causing the currency to dive from its Asia trading peak at 1.1068, reaching Monday’s 1.0966 lows on EBS. It is expected that the ECB will hike by 25bp next week, with a slightly lower Q3 peak, and a 25bp rate cut priced by February.
The USD/JPY fell 0.38%, indicating the unwinding of yen-funded trades, as the BoJ’s easy policies leave no room for added accommodation, unlike other central banks seen to eventually cut rates. The GBP/USD settled near its lows, while the AUD/USD fell 0.88%. The data calendar is set to heat up on Thursday and Friday ahead of the Fed and ECB meetings next week.
Technical Analysis
EUR/USD (4 Hours)
The EUR/USD declined significantly on Tuesday, dropping to as low as 1.0963 amid risk aversion and renewed banking concerns. Despite US yields decreasing, the US Dollar Index rose by 0.55%, while German bonds rallied, causing the German 10-year yield to fall by 6.5% to 2.34%. ECB officials continued to hint at more rate hikes, with market participants seeing a 25 bps rate hike as more likely. Positive US housing data exceeded expectations, reflecting resilience in the economy, while Thursday will see the US reporting Q1 GDP and consumer inflation.
According to technical analysis, the EUR/USD pair has fallen and was able to break below our support levels. Currently, the price has moved below the middle band of the Bollinger band, with expectations of moving even lower and targeting the lower band. It is anticipated that the EUR/USD will reach the support level of 1.0949. The Relative Strength Index (RSI) is currently at 44, indicating a bearish market for the EUR/USD.
Resistance: 1.0997, 1.1053
Support: 1.0949, 1.0916
XAU/USD (4 Hours)
On Tuesday, financial markets turned risk-averse, leading to a rise in demand for the US Dollar and gold (XAU/USD). The US Dollar initially gained on the news of major central banks reducing their dollar operations with the Fed from daily to once a week starting May 1, as well as discouraging data from the US. The CB Consumer Confidence Index fell in April, and any reading below 80 is viewed as a sign of a near-term recession. Despite Treasury yields being under pressure, the US Dollar remains strong, preventing XAU/USD from rallying beyond $2,000.
Based on technical analysis, XAU/USD has reached the $2,000 level and has the potential to continue upward toward the upper band of the Bollinger band, indicating a bullish market for today. The Relative Strength Index (RSI) currently stands at 53, suggesting a likelihood for further upward movement.
Resistance: $2,005, $2,018
Support: $1,988, $1,974
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