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 29th, 2022

FAMAG stocks drive sentiment in last week of April

Summary


For the second week running, the major focus – at least Stateside – was on corporate earnings. 178 of the S&P 500 companies reported earnings, including the FAMAG stocks and many bellwether US companies. Earnings were good enough mid-week to stabilise US equity markets after a very fragile start to the week, but Amazon’s poor results on Thursday after the close set the tone for a sharp downturn in US equities on Friday, ending another dismal month. European equity markets performed slightly better, although I suppose their pound of flesh will be paid Monday after the weak US close on Friday. Suddenly, it is good not to be so tech heavy in an index or portfolio. Earlier in the week, the focus was on Twitter, which gave up without much of a fight as the company looks to be heading into the hands of Elon Musk. Real GDP was negative for the 1Q2022 in the US, although most pundits attributed this mainly to technical nuances (discussed more below) rather than genuine broad-based economic weakness. Government bond yields spiked in the US, Eurozone and UK early in the week, then settled mid-week before vacillating and ending the week about where we started. Gold was down slightly on the week and oil prices were higher. The US Dollar continued to strengthen, whilst the Yen (vis-à-vis the US Dollar) continued to weaken, both hitting levels not seen in 20 years. The collateral damage of the stronger US Dollar on the UK Pound and Euro are increasingly evident with the Pound hitting its lowest level since the onset of the pandemic ($1.25/£1.00) and the Euro reaching its weakest level since the end of 2016 ($1.05/€1.00).

Earnings (S&P 500 companies)


178 of the S&P 500 companies reported earnings this past week, which I felt overall were generally good with a slight positive bias (not that it mattered). You can find the weekly earnings summary for the S&P 500 from Refinitiv here. Of the 275 companies that have reported earnings, 80.4% have beat consensus bottom-line expectations (vs L/T average of 66%), and 72.7% have beat revenue expectations (vs L/T average of 61.6%). The current forward P/E of the S&P 500 has fallen now to 18.2x.


Most investor focus this week was of course on the earnings of the FAMAG stocks, all of which reported Jan-Mar earnings (1Q22). As expected, these results were either going to stabilise markets or lead to another leg down. The results were mixed, with MSFT and AAPL arguably serving up the best results, and AMZN the worst. FB also surprised on the upside with the stock surging the most of the five, although I didn’t find their results particularly inspiring. FB’s run was simply a matter of beat-down expectations – FB shares were down 48% YtD prior to the company’s 1Q22 earnings release, and the company is the cheapest of the five by far when measured by P/E. I published the table below earlier this week (on Twitter, follow me here), and I have updated it for closing prices on Friday so you can gauge investors’ reactions to the FAMAG Jan-Mar quarterly results.


Meta Platforms (FB) and Amazon (AMZN)


As investors waited for the release of FB’s results Wednesday after the bell, I was uneasy knowing that the FB’s earnings could send the market, already on tenterhooks, either way the following day. Fortunately, the company delivered just enough to please investors, and the collateral goodwill spread quickly post-announcement into the broader market on Thursday. Unfortunately, AMZN’s surprisingly poor results on Thursday after the close contributed to a poor overall environment overall for stocks on Friday, with equities giving up Thursday's gains and more, limping into the close of the week and the month. The issue with AMZN as far as its core retail operations is that the company has a cost structure that was put in place to handle pandemic-demand, but this demand is now normalising and AMZN is stuck with a bloated cost structure which needs to be addressed.


Apple (AAPL)


Investors are also especially sensitive at the moment to guidance. This was particularly noticeable in the case of Apple’s results. Even though AAPL beat analysts’ top and bottom line consensus expectations (and generally served up another amazing series of results), the company’s CFO noted on the investor call that revenues could be $4 bln to $8 bln lower in the April-June quarter due to the ongoing supply chain shortages, mainly attributable to localised COVID lockdowns in China. This led to the shares falling 3.7% on Friday even though the company raised its dividend (again) and added $90 bln to its stock repurchase programme. This shows how fragile the market is, especially big tech, as valuations drift back to normal from elevated pandemic levels.

Twitter (TWTR), Elon Musk and Tesla (TSLA)

As for Twitter, I was expecting Elon Musk’s offer to serve as a stalking horse and that the Board would be able to extract a higher price for its shareholders than Mr Musk’s opening salvo. I wrote as much in my blog at the start of this saga (see here). However, in the few days it took Mr Musk to get financing in place, the Board apparently could not find a single other interested party. Perhaps TWTR’s 1Q22 results (weak), released Thursday before the open, were largely anticipated. Naturally, this raises the issue “is Mr Musk paying too much for TWTR?” This transaction has some antitrust hurdles to clear and I would suspect Senator Warner and her anti-business brethren will try to stop this on some basis, so the story has some time to run and several regulatory hurdles to clear. This acquisition by Mr Musk also led to collateral damage into TSLA’s shares, which were down 13.4% WoW. Perhaps this reflects the fact that Mr Musk can’t be two places (or more) at once, or more likely that he was dumping a reported $8.5 bln in TSLA shares during the week to fund his pending purchase of TWTR. (Although a separate topic for another day, I still don’t understand how a bid by Mr Musk can cause TWTR’s stock price rise to over 90% of the offer price, whilst ATVI is trading at less than 80% of the $95/share offer price of its deal agreed with MSFT in January. Go figure – both have regulatory hurdles I suppose, but I can’t reconcile this in my mind.)


What else mattered this week?


Other things that mattered this past week included:


  • Real GDP in the US decreased by 1.4% in 1Q2022, a negative reading that was way off consensus expectations (expecting slower but positive growth). When the figure was released, it did not seem to rattle markets much on Thursday, mainly because the decrease seemed to principally be a result of lower net exports. Lower net exports, in turn, were caused by Americans spending much more on imports. Further evidence of strength came from personal consumption expenditures, which increased a solid 2.7% in 1Q22. The BEA press release is here.

  • The Employment Cost Index released Friday showed accelerating wage inflation in the US, as anticipated (see here). This is not surprising given that insured unemployment fell to 1,408,000 for the week ended April 16, 2022, the lowest level in over 50 years (see DOL release here). The labour market is tight and wages are accelerating, so I suspect inflation will not begin to decline from its elevated levels until mid-summer.

  • Eurostat reported flash inflation in the Eurozone of 7.5% for April, up from 7.4% in March (Eurostat press release here). The ECB will almost certainly have to bring forward a series of hawkish measures to address rising inflation in the Eurozone.

  • Flash GDP released by Eurostat was an anaemic 0.2% for 1Q2022 in the Eurozone and 0.4% for the EU (see here). It is all beginning to sound a lot like the Eurozone could be in for a serious bout of stagflation.

  • Ongoing supply chain shortages due to the Ukraine-Russia conflict and localised COVID shutdowns in China are rattling markets, too, leading to further cost-push inflation.

What matters this coming week?

  • Another 160 of S&P 500 companies report earnings this coming week, and these results – like last – will influence sentiment. The Refinitiv report has a list of companies reporting, the day/time and analysts’ consensus EPS expectations. It is worth checking out here (towards latter half of report).

  • Much attention will be focused on the FOMC meeting on May 3-4, although a 50bps increase in the Fed Funds rate seems to be a foregone conclusion. The focus will be on the outlook for future rate rises and timing for quantitative tightening.

  • The Bank of England will release its Monetary Policy Statement and minutes from its Monetary Policy Committee meeting on Thursday mid-day (BST). Expectations point towards a 25bps increase in the overnight bank borrowing rate, the fourth consecutive increase in four meetings (since Dec 2021).

  • Monday is a bank holiday in the UK and the markets are closed


THE TABLES AND MARKET COMMENTARY


Global equity indices


The FTSE 100 (UK) and MSCI EM index (emerging markets) – rather strange bedfellows – were both positive this past week, hopefully saying less about where the UK is heading and more about both indices being short on technology names. The S&P 500 (US) was by far the weakest performing market for the week and had the worst performance of all the indices I track in April. Year-to-date, the SSE Comp (Shanghai) remains the worst-performing market. Only the FTSE 100 was positive in April and so far YtD. Recall that the FTSE 100 was identified as a value market (i.e. cheap) some months ago as other high-vol markets were running. A degree of geographic diversification never hurts in a portfolio.


US equity indices


There is no black in the table below for 2022 or – for that matter – in any period as long as 12 months. April was dreadful any way you slice it, particularly for the NASDAQ. The continued decline in technology shares weighed most heavily on the NASDAQ Composite with (relatively speaking) the DJIA being the “best of the worst”. The VIX has become highly elevated the last few sessions, closing the month at 33.4, a sharp increase since it began to move away from 20 +/- on April 20th. This suggests that more trouble could lie ahead, although we have seen these spikes on more than one occasion so far this year.


US Treasuries


US Treasuries bounced around much of the week, and UK and Eurozone government bonds followed a similar pattern. By the end of the week, we were more or less where we started as far as yields though. Volatility has also become heightened in the US bond market, as the volatility index for bonds (MOVE) is creeping towards highs last seen in early March.

Returns on US Treasuries also remain poor for the year, with the BofA-ICE 7-10y bond total return index having lost 10.4% during the first four months of 2022, and the similar 20y index having lost 19.0%. It is hard to believe that you could lose so much, so fast, in the bond market.


Corporate bonds (credit)


Credit spreads widened across the credit curve this past week, with European high yield being the worst affected. Aside from BBB-rated USD-denominated bonds, yields were also higher in both US and European high yield. It is increasingly feeling “risk off” again, although I continue to believe that – relatively speaking – high yield is not a bad place to park some of your cash, at least in the short term (and keep duration relatively short).




Safe haven and other assets


It is difficult to look at the table below and not notice first thing the sharp divergence between the US Dollar, which continues to strengthen, and the Yen, which continues to weaken. The stronger greenback is also having collateral effects into other currencies including the Pound and the Euro. This is great for US tourists coming to Europe this summer, and equally bad for Europeans heading to the US for summer holidays. The USD has to break at some point, but the fact is that the combination of a hawkish monetary rhetoric (leading to higher relative yields) and a still strong economy is pulling investors into the US market. Meanwhile, the Bank of Japan’s accommodative policies are so far away from other major central banks that the Yen seems destined to weaken further.


Gold was slightly weaker, and oil prices were higher albeit less volatile for the week. Bitcoin ended the week 2.8% lower than the prior week's ending level, and is now down nearly 17% YtD.


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