We're all going on a summer holiday...

As we start a new week, and the last week of trading for April, there is optimism in the air. Firstly, the EU is racing ahead with its vaccination programme after a rocky start and now expects 75% of the EU’s population to be vaccinated by July, which is ahead of schedule. The EU Commissioner has said that non-essential travel could open up between the US and the EU this summer, interestingly, travel between England and the EU was not mentioned. The world is expecting big things from this week’s for tech earnings for Q1, and there is also Fed meeting to digest. This is another big week for markets who are looking for clues about whether the post-Covid migration away from tech stocks in sustainable and also when to call the Fed’s bluff. 

The EU gives hope to the travel sector 

Looking at the EU statements first, they no doubt offer optimism to a market that has been increasingly fretful of late. Although markets remain close to record or multi-month highs, any negative headlines are making investors nervous, especially as prices have reached elevated levels. Today’s EU news has had a fairly muted impact on the overall indices, the FTSE 100 is currently up 0.3% while the Dax is basically flat. Airline stocks have surged on this news, with IAG, British Airways’ parent group, up more than 4% today, helping to recoup some of the losses it has faced for most of April. The impact on airline stocks has not only been felt by trans-Atlantic carriers in Europe, EasyJet and Ryanair are also up 3% and 2% today respectively. Although Ursula Von Der Lyon was only referencing American tourists, if other countries have similar vaccination rates to the US, currently the UK has vaccinated half of its population, then it seems reasonable to infer that tourist travel could be back this summer. Potential non-essential travellers have already been booking holidays and this has boosted the likes of holiday firm Tui, up by 5% on Monday, and Air bnb, along with the hotel sector and the travel sector more broadly, is expected to be one of the leading performers on both sides of the Atlantic as we start this week. Scenes of the ongoing pandemic in India look devastating, and while the international community rushes to help ease the pressure on India’s health service, financial markets have been remarkably calm, that, so far, there hasn’t been a major upswing in covid cases linked to the outbreak in India. This is adding further to hope that Covid vaccines are doing a good job at stopping the transmissibility of the virus along with severe illness from catching it, which is why financial markets remain confident and continue to price in a future without lockdowns and Covid dominating our every move. 

What now for tech? 

Ever since the first news of vaccines, the market has been replacing enthusiasm for tech stocks with enthusiasm for other sectors including banks, retail, energy, travel and other consumer stocks that are less reliant on tech and door to door delivery. This has been epitomised in the recovery of the FTSE 100, which has a high concentration of these companies. However, will tech earnings lure investors back to tech? While Amazon and Apple remain fairly close to last year’s highs, and are still trillion-dollar companies, the environment where there is a vaccine for covid has been less kind to some of 2020’s tech darlings, such as Zoom, which is down more than a third since its peak in October last year. GameStop, another tech stock that experienced a gold rush earlier this year as retail investors rushed to buy the stock, is also down by two thirds. The question is, can a week of mega earnings from the super tech sector boost the tech stocks that are lower down the food chain? 

First up to report earnings is Tesla, the electric car maker, its stock price has been recovering since selling off sharply in February and March. Tesla tends to be more volatile than some of the other tech giants, the key thing to look out for in today’s earnings will be the future outlook and margins, since Tesla’s stock price is based on favourable valuations of future cash flows. Google and Microsoft report on Tuesday, the market will be looking at any expected impact from a global tech tax proposed by President Biden, and also Microsoft’s growth of its cloud computing business. On Wednesday, Facebook and Apple will report earnings. Apple’s performance in China, expectations for the sales of its latest releases including its new iPad, along with iPhone sales growth will all be watched closely. For Facebook, the market will be looking for an update about its latest products and, of course, its ad revenues which tend to drive stock price growth. Also, expect some update on the potential ramifications from global political pressure on the company to do more to protect children and stop the spread of fake news. If it can deliver some optimistic news on these two enormous topics, then its share price could be handsomely rewarded. Amazon is the last of the tech giants to report earnings, and we are looking for diversity in its business model. It has already opened an Amazon supermarket in London and a hairdresser, its move into cloud computing and software will also be watched closely, as will the potential for its new furniture retail model than includes delivery and assembly, something that would go down very well in this house. 

Markets wait for direction from the Fed 

Overall, tech earnings are key for this week. It will be continued strong economic data along with strong corporate performance that will drive equity markets this year. While there are plenty of naysayers looking for the stock market to crash, we don’t think there is a catalyst for that right now. Big corporate earnings for Q1 from the US banks have already boosted expectations for earnings from the tech sector, which, if they continue to outperform, is likely to lead to a broad-based market rally, rather than tech outperformance. The dichotomy between tech and the rest of the market has been breaking down in recent weeks, as economically sensitive or value stocks have been performing well alongside the tech sector. This is partly down to US Treasury yields, the benchmark 10-year yield has backed away from its March high although it has started to rise slightly as we lead up to Wednesday’s Fed meeting. The yield is currently at 1.57%, after rising to 1.6% earlier. The market will be looking closely at this week’s Fed meeting for any subtle shits in tone from the Fed, or any sign that the strong US economic performance will push their hand to tighten policy sooner than is currently expected. If this happens, then we would expect a sharp rise in bond yields, lower tech stocks and a sharp rise for the dollar.