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The rally of the last few days might just be running into a bit of an earnings wall. Alphabet’s core search ad business suffered a sharp slowdown, whilst Microsoft warned of slowing cloud computing growth as it missed revenue expectations. Both fell over 6% in after-hours trading. Both are index heavyweights and with Apple, Amazon and Meta still to come today and tomorrow there is a risk of further disappointments. Spotify also felt the headwind of a slowdown in digital advertising as profit margins were squeezed. 

What does this mean for Meta, which reports Wednesday after market close? Q2 earnings saw the company miss on the top and bottom lines and issued a very weak forecast. Management cited a “continuation of the weak advertising demand environment we experienced throughout the second quarter, which we believe is being driven by broader macroeconomic uncertainty”. Facebook guided for Q3 revenue to be in the range of $26 billion to $28.5 billion, which would mark a decline of between 2% and 11% on last year. 

Bond markets are still in charge though – a sharp decline in Treasury yields yesterday fuelled further gains as Wall Street notched a three-day win streak. The US 10yr yield retreated further to sit around the 4.0% level having traded as high as 4.3% earlier in the week. The moves reflect investor optimism that there are enough signs of weakness in the economy to warrant the Fed easing off with rate hikes, whilst some dovish Fed remarks on Friday continue to drive the narrative.  

That might be a false hope. San Francisco Fed President Mary Daly said: "I think the time is now to start talking about stepping down. The time is now to start planning for stepping down.” But is she right? Will the Fed ease off? Inflation expectations are moving up again, yields are lower and risk is bid. The market has it favourite chew toy and is not letting go for now, but it seems rather premature. Yesterday’s house price data and consumer confidence report from the US added to the ‘bad news is good news for stocks’ narrative. 

Banks are in focus in Europe this morning with Deutsche Bank smashing third quarter earnings expectations thanks to rising interest rates. UniCredit raised its profit outlook, and Santander reported an 11% rise in profit. European stock markets are flat at the start of trade with the European Central Bank in focus ahead of tomorrow’s expected 75bps rate hike.

Barclays beat expectations thanks to surging revenues at its trading business. FICC (fixed income, currencies and commodities) trading operations revenues rose 93% but there was still nearly £1bn hit from a trading error in the US. Shares not seeing much uplift from this – usual concerns about trading revenues being one-off perhaps but also investors are not confident of seeing any returns. Whilst the report card is good there is a good deal of economic uncertainty and worries about a windfall tax on banks. Same goes for Standard Chartered, which posted a 40% rise in profits thanks to rising interest rate. Shares fell with no fresh buybacks – banks will need to wait until the windfall tax is known or no longer a risk before they can really start distributing to shareholders. 

The Twitter deal looks set to close with Elon Musk reportedly telling advisers on a video call that he will complete this week. David Faber at CNBC tweeted last night: “Equity investors in Elon Musk's take private of Twitter have received paperwork from his lawyers at Skadden Arps in order to prepare for closing the deal. It's another sign deal is on track for Friday close.” 

With the decline in Treasury yields came a sharp fall for the US dollar which saw peers make big gains. GBPUSD has rallied to 1.15 and broken above its early October highs. No doubt the arrival of Rishi Sunak as prime minister has helped soothe concerns about reckless fiscal policy – gilt yields are back to pre-Budget levels – but it the Treasury market and USD that is doing most of the work here. EURUSD has rallied to parity and USDJPY has backed off to the 147 area. 

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