European Markets Decline as US Banks Face Uncertainty | Daily Market Analysis

Key events:

• USA - GDP (QoQ) (Q1)
• USA - Initial Jobless Claims
• USA - Pending Home Sales (MoM) (Mar)

Yesterday, worries about the economic future loomed over European markets, resulting in a second consecutive day of decline. This was compounded by profit-taking in luxury markets and a lack of strength in defensive industries, creating a broader drag on the markets.

While basic resources experienced a slight rebound after being a weak point earlier in the week, the sharp drop in oil prices below the levels announced by OPEC+ at the beginning of the month highlighted a growing concern that demand could decrease even further in the coming months.

The US markets also experienced a mostly negative session due to concerns that the uncertainty in the regional banking sector could spread and lead to tighter lending conditions, ultimately slowing down the US economy.

It appears that First Republic, a bank, is heading towards its demise despite its efforts to implement various rescue strategies. The situation is dire as the bank continues to slide toward the FDIC, and there are no simple solutions. The stock plummeted by an additional 30% in a single day.

It seems that the bank is shrinking rapidly, and eventually, it may cease to exist altogether. Even last-minute buyers are hesitant and may only consider purchasing after the FDIC has taken over, assuming there is any value left to salvage.

Despite the Dow and S&P 500 finishing lower, the Nasdaq 100 received a boost thanks to Microsoft's positive performance, which helped to lift the index into positive territory. Technology companies appear to be serving as somewhat of a safe haven, with Meta Platforms, the owner of Facebook, set to offer further support after reporting better-than-expected Q1 revenues and profits, as well as an upgrade to Q2 guidance.

For Q1, revenues came in at $28.1 billion, representing a 3% increase and surpassing expectations of $26.76 billion, while profits reached $2.20 per share, or $5.71 billion, a decrease of 24% but still above expectations. Costs and expenses rose by 10% to $21.4 billion.

On a positive note, Q2 revenue guidance was adjusted upward to a range of $29.5 billion to $32 billion, while full-year operating expenses are now projected to be between $86 billion and $90 billion, a $5 billion decline that includes $3 billion to $5 billion in restructuring costs. However, the Reality Labs segment, or metaverse continued to suffer losses, losing nearly $4 billion as revenues fell to $339 million.

It appears that the US equity market is currently in the midst of a significant bear market. Despite this, the Federal Reserve is planning to increase rates at its next meeting, regardless of the situation with the First Republic. Interestingly, the Fed has shown in the past that they view continuing rate hikes during a banking crisis as reassuring to the markets.

While the recent drop in oil prices may help to keep monthly inflation stable, there is still a real threat of inflation in the services sector. At the following meeting, there may be a debate about whether to raise rates again, but it is likely that they will proceed with the hike. It is expected that there will be at least two more rate hikes in the future, and potentially more if there is another surge in oil prices.

Overall, the expectation is for the US economy to experience a slight slowdown from 2.6% in Q4 to 2% in the upcoming quarter, while personal consumption is anticipated to rebound strongly from the 1% seen in Q4.

On a positive note, US Durable Goods Orders experienced a reasonably strong increase, but as with a lot of recent data, there may be other factors at play.

The recent banking turmoil may have had an impact on economic output towards the end of the quarter, but the full extent of this won't be known until later revisions in May.

However, despite this instability, the strong labor market and wage growth at the beginning of the quarter are expected to contribute to a strong personal consumption component.