CENTRAL BANKS AND EARNINGS CREATING VOLATILITY

After a very volatile few days, the mood in the market has calmed on Wednesday. Investors await news from the Fed, the BoC and a slew of US socks, including Tesla.

• Europe rises after a late rally on the Dow Jones
• Today’s main event is the Fed
• Could the BoC start hiking rates today?
• Microsoft beats estimates, Tesla due to report

Yesterday saw Wall Street whipsaw before the Nasdaq closed -2.28% lower amid the ongoing rotation out of high growth tech. The Dow Jones, which is more closely tied to value stocks closed just -0.2% lower, following a strong rally off session lows, a move which is helping Europe charge out of the blocs this morning.

Sentiment has been driving some big swings across the markets this week as investors monitor the Russia – Ukraine conflict and in anticipation of the January Fed meeting. Whilst it is impossible to know what Putin may, or may not do next, the waiting game for the Fed is almost over.

Fed rate decision

The US central bank is not expected to raise interest rates today, from the 0.25% historic low. Instead, the Fed is broadly expected to prepare the market for a rate rise in March, when the bond purchasing programme is also expected to conclude. Any hawkish surprises from the Fed could see the market sell off continue.

Gold steady on mixed drivers

Gold hit a 2-month high on Wednesday, helped by haven flows. On the one hand, geopolitical uncertainty over a potential invasion by Russia into Ukraine is underpinning the precious metal. On the other, the prospect of a more hawkish Fed is limiting the upside for non-yielding gold. Currently $1850 is acting as a strong psychological barrier. Any hawkish surprise from the Fed regarding its balance sheet reduction could prompt a correction in the yellow metal. Meanwhile, escalation in tensions in eastern Europe could boost Gold towards $1880, the November high.

BoC rate decision

The Fed isn’t the only game in town today, the BoC are also due to give their rate decision. The BoC, in the December meeting, indicated that they are looking to hike rates in mid-2022. However, the economy has been performing well helped by higher oil prices, unemployment is back below 6% around pre-pandemic levels and inflation is at a 30 year high. Given the current economic picture the BoC could surprise by firing the rate hike gun early; a move which could boost the Canadian Dollar and send USD/CAD back towards 2022 lows of 1.2450.

US earnings

US earnings continue to attract attention. Microsoft is moving higher pre-market after beating quarterly forecasts on both the top and bottom line. Strong growth in the cloud business helped profits jump 21% to $18.8 billion in the final three months of the year, on a 20% increase in revenue to $51.7 billion across the same period.

Microsoft is the first of the big tech companies to report with the likes of Apple, Amazon, Meta and Alphabet to follow. Investors will be watching closely to see whether impressive numbers and guidance can tame the current tech rout.

Tesla is due to report after the close today. We already know that the EV maker recorded a record number of deliveries in Q4, topping 300,000 for the first time. Across 2021 Tesla saw deliveries rise 87% to 936,172. This is expected to moderate to 50% growth moving forwards, although this is dependent on both the Texas and Berlin factories firing up. Watch for EPS of $1.63 on revenue of $16.35 billion, up firmly from $10.74 billion Q4 2020.