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The S&P500 and Nasdaq renewed record on Monday, as investors focus on robust first quarter earnings rather than the rising new Covid cases globally. The vaccine rollout certainly helps tempering the worries of seeing another round, or rounds of lockdown in the future, while the financial conditions will remain as supportive as possible until the central banks hit the inflation wall.  

Yesterday, the US durable goods orders revealed a slower-than-expected growth in March. That’s one less worry for the Fed doves before Wednesday’s FOMC announcement. The Federal Reserve (Fed) can’t afford to make any comments that would awaken the Fed hawks at this week’s meeting, especially given that Biden’s plan to almost double the capital gains tax is the next important test for the market, and market needs the Fed’s support to navigate through such an impressive rise in capital gains tax. 

But the rising inflation expectations due to the skyrocketing commodity prices and robust growth could titillate the Fed hawks at some point, and shift the attention from robust first quarter earnings to what would happen to these earnings once the financial conditions start being tightened. 

For now, the soft US yields tell us that tighter financial conditions is not a major worry. Investors follow Jerome Powell blindly in his ultra-supportive policy lead, and the Fed clearly reaps the fruits of a key tweak to its inflation target from 2% to the ‘average of 2%’. Given how soft the inflation was during the pandemic months, it gives the Fed a good margin to take on a stronger rise in consumer prices for at least a couple of more months and that’s magic. 

Soft US yields and rising inflation expectations is the best combination for boosting gold prices above the $1800 per oz, especially now that the upside potential in industrial metals should show some signs of exhaustion with prices looking overstretched.  

In the FX, the EURUSD’s move above the 1.2080-1.21 zone reversed the bearish trend and paves the way for a further appreciation towards the 1.2300/1.2350 area. From a technical perspective, the 100-day moving average (1.2055) should provide support to the positive reversal in the euro appetite. Now that the ECB dovishness is fully priced in, the downside risks have mostly lessened. 

On the company side, Alphabet and Microsoft earnings are under close watch today. Both Alphabet and Microsoft’s share prices hit a record high yesterday. Earnings expectations are strong on the back of the fast-growing and much lucrative cloud business for both companies. Any earnings miss could generate some profit taking, without however harming the solid positive trend in the Alphabet and Microsoft’s share prices.  

The biggest threat to the positive trend in technology stocks is the reflation trade, which would boost demand for cyclical stocks and move capital from the tech stocks towards the value names. But it looks like that migration from growth to value is happening without too much harm for the tech stocks for now, and some digital services, including the cloud business will unlikely be affected by the reflation theme as the end of the pandemic won’t reverse the migration of our data storage to the clouds.