US Open – Stocks down despite Fed assurances

Caution ahead of earnings season

US futures are pointing to a slightly softer open on Friday, ending the week on a slightly negative note despite a massive stimulus proposal and reassuring comments from the Fed.

Joe Biden unveiled his $1.9 trillion stimulus plan on Thursday, a number more or less in line with what had been leaked as he sought to provide essential support in the next phase of the crisis.

With the details now out there including certain components that will seriously struggle to get Republican support, it now becomes a question of just how united Senate Republicans are and what, if any, changes will be necessary to get it through.

One question on investors minds has been what a stimulus package of this size will mean for interest rates and bond buying over the coming years, with yields rising in the aftermath of the Democrats’ victory in Georgia. Clearly the expectation has been that it will mean tightening will be necessary sooner but Fed officials have sought to play down these worries.

Fed Chair Jerome Powell joined the chorus of voices seeking to alleviate any concerns, stressing they were far from considering an exit from the extensive policy support they’ve provided. He also acknowledged the market sensitivity to their actions and words and was clear that when the time comes to communicate an exit, they will do so very clearly.

Those words will provide some reassurance to investors and yields have fallen slightly in response to them but the 10-year Treasury remains above 1% for now, so investors aren’t totally convinced. Any removal may not be planned any time soon, but that doesn’t mean the path of travel for rates hasn’t changed over the last month and that’s what the markets are suggesting.

UK adapting to lockdown life

The UK is adapting to lockdown life, as evidenced by November’s GDP release, which showed the economy contracting only 2.6%, compared to October, despite the country being back in full lockdown. This is encouraging given that the country is back in lockdown for at least another month and while the economy should suffer more under even tighter restrictions, with some industries harder hit than others, it won’t be nearly as bad as last April/May.

The data didn’t do the pound much good. A brief moment of reprieve was quickly reversed and the currency remains almost half a percentage point down on the day against a resurgent dollar, slightly less so against the euro. The pound has looked a little overstretched in the aftermath of the Brexit deal and may be seeing some profit taking.

JPM higher after earnings beat

JP Morgan got earnings season off to a solid start today, reporting earnings and revenue well ahead of analysts expectations, while also releasing $2.9 billion from previously set aside loan provisions, thanks to the latest Covid stimulus and vaccines developments.

Trading and investment banking were two bright spots, with the environment last year being very beneficial, something we should see reflected in other reports in the coming days. These are very encouraging results, even if the shares are only a little higher in pre-market trading.

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