My view on what's going on in the financial markets and the global economy, and a few other things that might interest me from time to time.

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  • tim@emorningcoffee.com

Week ended April 22, 2022

Updated: Apr 23

EARNINGS DOMINATE, EQUITIES AND BONDS WEAKER


This past week saw attention shift towards US corporate activity, mostly in the context of quarterly earnings releases. Company news relegated ongoing concerns regarding bond yields (higher), COVID (fading but not over yet), Ukraine-Russia war (on-going) and Chinese economic data (mixed at best). With this context – and even with reasonably decent earnings so far albeit early in the season (99 of the S&P 500 companies have reported earnings) – global equity and bond markets continued to slump. In the US equity markets, selling pressure intensified across the board in Friday’s session, with all of the indices down sharply. More on that depressing topic in a moment, but first, here is what caught my eye this week.


[SKIP THIS COMMENTARY AND GO STRAIGHT TO THE TABLES]


Earnings this past week that shaped market sentiment (or tried)

The largest six US banks have finished their earnings announcements with Bank of America (BAC) reporting its earnings on Monday. With the exception of JPM slightly disappointing at the onset, earnings of US banks were largely in line or slightly better than consensus expectations. Guidance, whilst guarded, was by no means pessimistic. In particular, there seemed to be some optimism that US corporate lending was finally picking up, positive especially for US regional banks. The ETF bank indices performed as follows for the week keeping in mind that the S&P 500 was down 2.8% WoW: XLF (large/global banks and asset management firms), down 2.0%; and KRE (regional US banks), up 0.3%.

Twitter (TWTR): I wrote about this interesting situation in an article earlier this week that you can find here, and am also writing about this transaction on Twitter (access here). The potential acquisition of TWTR by Elon Musk progressed with an announcement late in the week that Mr Musk had obtained debt financing led by Morgan Stanley. This situation has a ways to run, but I continue to believe that TWTR will be sold – possibly to Mr Musk but perhaps not – and at a higher price ($58-$60/sh). I see absolutely no ground for management or the Board to stand on to keep the company independent by utilising a poison pill defence. Netflix (NFLX) reported its 1Q22 earnings, which were massively disappointing for the second consecutive quarter. Most concerning to investors was the company’s decline in subscriber growth (-200,000 for the quarter), the first ever. I have written about NFLX before (here and here). These articles are slightly dated, written around the onset of the pandemic, although even then I thought the company was richly priced. This is a company I admire and like (and use) a lot, but the combination of a shifting competitive landscape, people returning to work post-pandemic (can I say this yet?), and an overly rich valuation have clobbered the stock. NFLX closed the week at $215.52/share, down 36.8% for the week, and off 68.8% from its all-time high close of $691.69/share less than six months ago (Nov 17, 2021).

Tesla (TSLA) reported solid earnings and volumes Wednesday after the close, and the company reaffirmed its 1.5 million unit volume sales target for 2022. Tesla-haters were left disappointed, and the shares popped nearly 10% post-earnings overnight before settling during a weak session on Thursday. The stock closed the week at $1,005.78/share (+2.0% WoW).


Several of the US airlines have reported earnings, including American (AA) and United (UA). Although both still lost gobs of money on the bottom line, the trend is favourable for the industry as far as passenger count and revenues. Pent-up demand is spawning a real surge in travel as the pandemic winds down, with more optimism ahead as the summer season is about to kick-off. I have flown a few times this year trans-Atlantic, and on every flight, the capacity has notably increased. Of course, the pandemic headwinds have given way to others, namely higher fuel prices and wage costs, but still there is reason to be optimistic. Personally, I find it hard to get too excited until there is more certainty around a return to bottom-line profitability. The positive trends in the airline industry should extend to the broader leisure industry, and perhaps even to the broader US economy. For reference, the airline ETF JETS is up 32.2% since its low on March 7th, 2022, although the index has been highly volatile the entire year.

99 of the S&P 500 companies have now reported earnings according to Refinitiv, and 77.8% of corporate earnings have beaten consensus expectations, versus the long-term average of around 66%. You can find the excellent weekly summary of S&P 500 1Q22 earnings from Refinitiv here.


Economic Datapoints


Briefly, economic news that mattered this past week mainly revolved around the following:

  • IMF revised global growth down for 2022 and 2023 to 3.6%/annum (see IMF report here),

  • Fed Chair Powell said on Thursday at the IMF meetings that a 50bps increase in the Federal Funds rate is pencilled in for the May FOMC meeting (Investopedia article here),

  • ECB is more guarded (than the Fed) in their approach to see off inflation, ECB President Lagarde said at the IMF meetings this past week,

  • UK consumer confidence plunged in the most recent GfK survey, reaching its lowest level since 2008 (see here)

  • China reported 1Q22 GDP growth of 4.8% YoY, coming off a strong 1Q21 figure; analysts were mixed on the growth rate (see official press release here)

  • US initial unemployment claims fell again for the week ended April 16th, to 184,000. The number of insured unemployed fell to 1,417,000, the lowest level since February 1970, indicating a very strong US economy that is arguably running too hot, stoking inflation (see DoL release here).


THE WEEK AHEAD


As we enter the final week of April, my focus will be on three major upcoming events:

  • Earnings – It’s a huge earnings week for the S&P 500, with 178 of the S&P 500 companies reporting. Earnings this week will either be highly stabilising or lead to another leg down. Much attention will be focused on the infamous FAMAG companies which report as follows (all after the close):

  • GOOG and MSFT Tuesday;

  • FB (Meta Platforms) Wednesday; and

  • AMZN and AAPL Thursday

  • French election – The runoff election for the French Presidency between incumbent Emmanuel Macron and far-right candidate Marine Le Pen will occur on Sunday. Mr Macron seems to have a narrow lead in the polls. The repercussions of a Le Pen win would shake Europe and European markets.

  • Run-up to the FOMC meeting (on May 3-4) – I’m not sure what else any other Fed official could possibly say to scream “50bps increase in the Fed Funds rate” to the markets. Every time this coming reality is mentioned, the markets shudder. Sure, the FOMC meeting is not this week, it’s the next. Even so, it will be a relief when we move beyond this……so we can focus our “Fed anxiety” on the next FOMC meeting in mid-June!


WEEKLY DATA AND THE TABLES


Global stock indices


Global equities were pummelled across the board last week, with only the Nikkei 225 holding its ground somehow.

US equity indices


Higher yields continue to have the most perverse effect on the NASDAQ, although none of the US indices did well this past week. All were down sharply especially on Friday (2-1/2% to 2-3/4%) with selling pressure accelerating into the close. There was no thematic place or sector really to hide, as the selloff was broad.

US Treasuries


US Treasuries remain under intense pressure and seem to weaken further every time anyone from the Fed utters a work about higher rates. I’m not sure I completely get this – how could the Fed’s intentions keep coming as a surprise to investors? I understand growing concerns about the Fed successfully pulling off a soft landing without tipping the US economy into a recession. Or perhaps higher yields in the bond market reflect a lack of confidence that the Fed will follow through if market conditions and the economy worsens. Whatever the reason, the trajectory of yields is unequivocally higher week after week, with no counterbalance resulting from a flow into the safe haven US Treasury asset class from more volatile equities. If you want to read messages into the shape of the yield curve, it did flatten this week, as the short end of the curve took the worst beating.

Corporate bonds (credit)


Yields in corporate credit could not completely sidestep increases in yields on underlying UST bonds this past week. However, credit spreads were a different story. Credit spreads widened only modestly in investment grade (BBB) credit (+3bps), but credit spreads in the high yield market came screaming in, ending the week much tighter (-18bps WoW). It might seem unusual for equities to be struggling whilst credit spreads at the riskiest end of the corporate bond market improve at the same time. However, with a robust US economy and no visible signs of higher defaults on the horizon, high yield bonds are a decent asset class at the moment (relatively speaking). In fact, given the higher yields, I suspect that a diversified high yield bond fund might be a good place to park some money if we start to see UST yields stabilise. One fly-in-the-ointment would be a sharp drop in energy prices given the reliance of many US independent oil & gas companies on high yield debt for funding their operations.



Safe haven and other assets


Gold was slightly weaker on the week as it continues to trade in the mid-$1,900/oz area. The US Dollar and the Yen continued their divergent trajectories, with the greenback strengthening again whilst the Yen continued to weaken further as the BoJ is increasingly isolated with its ongoing accommodative policies. The strong US Dollar is attributable to a combination of an increasingly hawkish Fed that is hellbent on raising the Fed Funds rate and an economy – the largest in the world – that continues to perform strongly. A stronger US Dollar is coming at the expense of Sterling and the Euro, as both currencies have now blown through recent lows.

Oil continues to trade range-bound in the low $100/bbl area. Bitcoin was slightly weaker this past week, falling below $40,000 again.


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