Market snapshot: investors await big tech earnings reports

US earnings abound in the final week of October, while in the UK, there are updates from the likes of Shell and Unilever, writes Richard Hunter. 

Markets ended the week on a positive note, with hopes that peak aggression from the Federal Reserve rate-hiking policy may be edging nearer proving enough to release a bout of optimism.

Comments from some Federal Reserve members and newspaper reports combined to imply that the pace of rises may need to slow to avoid an unwanted recession in the world’s largest economy. A rise of 0.75% in November is still seen as almost certain, but for December there could be a lesser hike as the impacts of the rises hitherto wash through. At the same time, the terminal rate also eased, with markets now pricing in a terminal rate of under 4.9%, edging down from the previously expected 5%.

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The optimistic sentiment prevailed despite some disappointing earnings releases from the likes of Verizon Communications Inc (NYSE:VZ) and American Express (NYSE:AXP), the latter of which suggested they were bracing for more customer defaults, and adding to the sharp decline in Snap (NYSE:SNAP) shares after revenues which were well below expectations. More positively, banks posted strong gains amid the possibility that they may recently have been oversold, while there were also faint hopes that the benchmark 10-year Treasury yield may also be nearing a peak.

This week will provide some stern tests as investors continue to sort the wheat from the chaff. Economic updates will arrive in the form of US GDP and the core inflation numbers at the end of the week, while in the meantime the third-quarter reporting season continues apace with updates from the likes of Apple (NASDAQ:AAPL), Microsoft (NASDAQ:MSFT), Alphabet (NASDAQ:GOOGL) and Amazon (NASDAQ:AMZN).

Even after the weekly bounce, markets nonetheless have much ground to recover. In the year to date, the Dow Jones remains down by 14%, the S&P 500 by 21% and the Nasdaq by 31%.

Asian markets were rattled by some delayed economic figures from China, while the Japanese yen remained caught in the crosshairs of a relentlessly strong US dollar. This was despite some signs of recovery coming from China, where GDP rose by 3.9% as compared to a predicted hike of 3.5%, although any bullishness was short-lived following a paltry rise of 2.5% in retail sales. Nonetheless, the economy remains vulnerable to the effects of a potential global recession, while Covid-19 restrictions and a stuttering property sector continue to add to the country’s headwinds. In addition, the new membership of China’s governing body was revealed, prompting some doubts on whether the regime would be driven by ideology rather than growth-focused policies.

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For the UK, sterling found some support as the political drama continued to play out, with Rishi Sunak now being touted as the strongest prime ministerial candidate. The current level of sterling at over $1.13 is a comfortable improvement to the level of £1.03 which it had briefly touched, but a rampant US dollar this year has eroded the price of the year’s opening level of $1.35. In spite of the possibility of some political stability being restored, the UK economy remains in a potentially dark place, and the FTSE 250 has served as a barometer with a drop of 26% this year.

The FTSE 100, which has made a slight recovery to stand down by 5% in the year to date, opened cautiously positive in an important week for earnings. In particular, the banks showed some strength ahead of their reporting third-quarter numbers which investors will scour for any further provisions in terms of bad debts, as well as slowdowns in both mortgage lending and investment banking (where applicable), as was seen in the recent updates from the US sector. In addition, updates from the likes of Shell (LSE:SHEL), Unilever (LSE:ULVR) and WPP (LSE:WPP) will provide further colour to pockets of the economy which have had differing fortunes of late, given the strength of the oil price, the defensive protection of household products and muted advertising spending.