Market outlook: growing pains
At a Glance
The FX desk is adopting a cautiously optimistic view on the equity markets despite recent sideways trading patterns, attributing this stance to a stable earnings outlook that alleviates concerns over stretched valuations. Per the full note by Johan Larsson at Nordea, global equities have maintained a sideways trajectory since mid-April, which may influence currency pairs negatively correlated with risk appetite. The desk recognizes that while earnings growth is improving, it plays into a complex dynamics of valuation concerns that traders need to navigate thoughtfully.
Key Takeaways
- 01Equity markets have experienced sideways trends, but earnings outlook is improving.
- 02Nordea highlights ongoing shifts in corporate earnings as a stabilizing factor.
- 03The EUR/USD currency pair is at a consensus target of 1.075.
- 04Divergence in firm opinions illustrates varying responses to economic conditions.
Full Analysis
What the desk is arguing
The desk posits that although there have been indications of a sideways trend in global equities, the strengthening earnings outlook is sufficient to relieve some pressure on valuations. Per the full note source, a continual improvement in corporate earnings could serve as a stabilizing force in the markets.
This implied recovery is underpinned by significant developments from major firms reporting better-than-expected earnings in recent quarters. As per Nordea's projections, while valuations might still lean towards the higher end, the earnings environment appears promising and conducive for maintaining existing risk positions.
Where it sits in our coverage
As per our internal assessments, the FX desk is aware of a consensus target for the EUR/USD pair at 1.075 with a range noted between 1.04 and 1.12. Underlying factors influencing this consensus include: - JPMorgan: target at 1.10 for March 2026 - BofA: target at 1.04 for March 2026
This outlook places our view in line with JPMorgan, suggesting a more optimistic stance relative to BofA's contrarian position.
How other firms see it
Several aligned firms are echoing the sentiment expressed, particularly JPMorgan, which has positioned itself confidently higher towards the targets amidst improving earnings projections. Conversely, BofA remains cautious, positioning on the lower end of the spectrum, potentially indicating divergence in views about the sustainability of current equity trends.
Relatedly, movements in the EUR/USD pair will be closely linked to trends from the U.S. Fed regarding interest rates and inflation indicators that reflect on risk sentiment.
Market Implications
Traders should closely monitor the EUR/USD as it interacts with the broader earnings narrative, with key levels to watch around 1.075. A potential surprise in corporate earnings reports or shifts in U.S. economic data could catalyze movements in currency pairs tied to risk sentiment.
From the original
Markets and investment Market outlook: growing pains Johan Larsson 31-05-2021 After a strong spring, global equities have traded in a sideways pattern from mid-April. Combined with a continuously improving earnings outlook, this has shaved the worst edge off extended valuations.
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The desk interprets the current resilience of risk assets as a positive signal for broader market stability, which may encourage a bullish stance in the FX space. Per the full note from ING Economics, this sentiment is largely attributed to ongoing recovery trends, particularly in equities, suggesting that traders are willing to embrace risk despite recent market volatilities. This positioning reflects a belief in stable economic prospects, likely bolstered by central bank policies aiming to maintain liquidity. With no high-impact events occupying the next 30 days, the current environment provides a conducive backdrop for risk assets to thrive.
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The desk maintains a cautiously optimistic view on the short-term economic outlook, driven by resilient consumer spending and a potentially favorable December FOMC meeting, as highlighted in the commentary from UBS. Per the full note, recent data shows 2.7% real spending growth, reflecting a solid recovery trajectory which should support further upward momentum in equity markets and, consequently, a favorable environment for risk currencies. However, with crucial labor market data upcoming, the desk underscores the need for careful attention to shifts in economic indicators and Fed communications, particularly as market participants speculate on rate cuts and their potential impacts on currency valuations.
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