Markets week ahead: Markets in wait and watch mode

Last week’s economic data showed some softness, be it trade data from Asia, FDI figures from China or US beige book survey (Slowness in hiring and inflation indicated). Manufacturing PMI in Europe also remained in the contraction zone. All this raised the probability of central banks’ rate cuts by end of the year.

However, services PMI remained in the expansion zone and core inflation has remained elevated in developed nations. This points to further tightening of data. Also banking results in the US showed good performance of big commercial banks but issues are visible with investment banks as deal activities took a hit due to the slow economy. In India, earnings by IT services disappointed but good results by Reliance and ICICI upped the mood.

So the market will look for further cues on where central banks will go.

This week we will see GDP data from the US, Europe (lagging data), and inflation figures from Europe and Asia (lagging but important data). We will also have business and consumer confidence data from Europe as well as US (forward looking). Confidence is expected to improve or remain the same. GDP is expected to fall in the US (From 2.6% to 2% “YoY”) and Europe (From 1.8% to 1.4% “YOY”). Inflation in Japan and Germany are expected to fall by 0.1%.

Improvement in confidence and stickiness in core inflation will support the hawkish stance of central banks.

Central Bank in Japan has got a new governor. So his 1st monetary policy will also be reviewed by markets.

On the geopolitical front, the Chinese ambassador to France questioned the sovereignty of Baltic nations. This irked European nations. Also, Russia threatened to pull out of the grain deal from the black sea as EU proposed export bans. But given the stalemate of the Russia-Ukraine war, markets are more likely to react on concrete actions than just rhetorics. Thats because right now ecnomic data, central bank actions and earnings reports rank as more important factor than geopolitics.

Coming to earnings in US big tech firms like Google, Microsoft, Amazon, and Apple will come up with earnings. This year tech firms have performed well but they have also announced layoffs. Now we will look to see how they have fared, their outlook as the economy will revive and comments about the evolution of generative AI.

In Europe, big banks like UBS, Barclays and Deutsche Bank will come up with earnings results. They will be carefully scrutinized to assess the spillover effect due to the demise of Credit Suisse into the European financial system.

Even in India, big banks and financial services will present their results. Various investors have high hopes for financial companies and the results of ICICI Bank lived up to expectations. However, Nomura stated in recent report that credit growth may falter due to slower economic growth and lower working capital needs as WPI has subsided. Now this is interesting. Banks will need higher private capex and higher demand for loanable funds as growth drivers. There are concerns on both these fronts. So road for banks may be tough.

Results of FMCG majors like HUL and Nestle will shed light on recovery in volumes and the rural sector. In light of El-Nino, we will keep an eye on commentary by FMCG majors about rural demand outlook.