Fight or Flight! 

Nadia ElBilassy, Market Analyst at Equiti

Another credit crunch? No, just earnings season. The US hit a $31.4 trillion debt ceiling last week! 

Moody’s analytics described the possibility of the US going into a debt default as devastating, but markets are showing no signs of panic. Banks seek out the urgent need to raise limits for more lending, otherwise, it will lead to global financial instability. In fact, what we should be seeing is a shock wave to stocks and different asset classes on the back of shattered consumer confidence and perhaps a labour market fallout. But that’s not the case of market sentiment this week. Markets seem excited for earnings season shrugging off the big implicates of reaching a debt ceiling. 

In the latest remarks from Janet Yellen, the treasury secretary affirmed that they will be taking extraordinary measures otherwise it can cause irreparable harm. So, while markets keep calm in anticipation of for congress to vote for raising the ceiling, Republicans are delaying the process as they demand spending cuts. The highlight of this week capitalizes on earnings reports.

Several contradictory price action has made us question how close we are to a perilous recession as investors remain bullish on several assets, for example, caterpillar, a global benchmark for the world’s largest manufacturer of construction equipment that tracks growth seems stable enough despite looming recession fears. 

A lot of this is interlinked to the world bank cutting global growth recently as the world bank president David Malpass reveals that the global economy is unlikely to see a strong recovery in 2023 and going into 2024, blaming persistent inflation. Also saying that investors are just finishing off projects funded months ago.

Looking into international benchmarks, major indices that reflect the global economy too, such as the Dow Jones, S&P500 and the Nasdaq, although have witnessed a bearish market in 2022, seemingly, they have strong footing now forming a sideway trend, after moving in an ascending channel starting October 2022. The Dow Jones which carries the 30 most prominent US companies, remains stable above levels of $33,000 and could break this level supported by central banks reducing the pace of rate hikes.

Whilst earnings season is obviously the key highlight right now and not the global economy falling into recession and witnessing unimaginable (also Moody’s) effects of reaching the debt ceiling and potentially taking us into a credit, liquidity, and market crisis. The icing on the cake is that major indices are plausibly staging a rally, as we move closer to a level of $3,980 for the S&P. And with the current market fundamentals including the labour market, it’s a clear way for the S&P to break $4,200 again. Especially after retracing back near levels of $3,800 last week. 

For the Nasdaq, Tech earnings will be a major catalyst in the performance of the Mega-cap index, moving now into a sideway trend near $11,650 a break above $11,700 can potentially take us near $12,000 again. What’s contradictory is that market expectations for 2023 were questioning a bottom, but prospects of an economic slowdown are yet to have the immense effect on stocks as priced in to be. Casually being in flight mode. The big question this week falls under if earnings were to come more disappointing than anticipated would markets still show resilience?

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