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 February 4th 2022

“Investor relations departments know how to set a lower bar for themselves to “beat expectations” on announcement day. But the pandemic rebound created an implicit expectation to be surprised (yes, that’s a contradiction in logic, but people still expected to be surprised) that grew ever greater. That era is finished. Meanwhile, the market is showing much more of a penchant to punish “misses” than it usually does. For a chief financial officer, the risks are asymmetric. – John Authers, Point of Return, Bloomberg Opinion


As John Authers suggested mid-week, companies that miss earnings get punished. The poster child this past week was Meta Platforms (FB), as their stock got absolutely crushed after missing analysts’ consensus expectations for 4Q21on Wednesday. Then on Friday, probably one of the biggest economic data misses ever took place, as 467,000 new jobs were added to the US labour force in January against a consensus expectation of only 125,000. Several Wall Street firms expected declines, one of 400,000! Yields soared after this data was released, but equities ­– notably tech shares – brushed it off, with investors cheering the strong economic news rather than lamenting the sharp increase in yields. And of course, there is also AMZN to thank, up 13.5% on Friday following a strong earnings report after the close on Thursday. Let me touch on these matters and a few others before going to the tables, although if you wish to go straight to the tables, click here.


Earnings

Let’s start quickly by looking at corporate earnings, and there’s no better place to start than with the FAMAG companies since all five have now reported, including GOOG, FB and AMZN this past week. FB is clearly the black sheep of the FAMAG stocks, because it was the only one of this infamous group of tech giants to disappoint. Although investors in FB shares paid a dear price, I wanted to share a couple of observations about the company. Firstly, I find it somewhat ridiculous that FB’s shares fell as much as they did (26.4%) in a single day on Thursday post-earnings. FB is a strong company. Its revenues increased 37% Y-o-Y, the company has very juicy operating margins of 40%, and it generated a whopping $38 bln of cash flow last year. Secondly, an average of 2.8 billion people use one of FB’s platforms (Facebook, FB messenger, Instagram or WhatsApp) each and every day, which is 35% of the planet’s entire total population. Can you think of any other company with that sort of global penetration? Having said this, I am aware of the concerns, including stagnant growth in Facebook (app), less accurate user / data tracking (thanks to Apple), and significant investment in VR / the metaverse which is money-losing and possibly a distraction from the core business. But still….. were the numbers really that bad? At the other end of the spectrum, I also didn’t think AMZN’s numbers were fantastic. The mark-to-market on Rivian was a very material and likely non-recurring bottom-line contributor, but investors seemed much more focused on the strong growth in the cloud business and the pending $20/annum increase in Prime. Since the FAMAG companies have now all reported, here’s the scorecard for earnings for these tech giants (and vis-à-vis the indices) for the quarter ended Dec 31st 2021, in order (left to right) of date of earnings release).

As the table illustrates, all of the companies except FB have outperformed the S&P 500 and the NASDAQ since Jan 21st, a date that is before any of the FAMAG companies had released earnings. Although FB wasn’t the only company that released disappointing earnings this past week, it was clearly the leading cause of a quick about-face in sentiment that led to an absolutely miserable session on Thursday in global equities. Similar to the week before, were it not for tech giants GOOG and AMZN killing it in between the FB debacle on Wednesday post-close, things might have been much worse. The S&P 500 had been up four days in a row until mid-week, and as the rally fizzled, all eyes were on AMZN Thursday after the bell. What more can be said? If you want to catch up more on the most recent week’s earnings for the S&P 500, check out the very comprehensive weekly update from Refinitiv here.


Central banks’ policy decisions: Bank of England and ECB

Aside from US payrolls on Friday, investors were most focused this week on the Bank of England and the ECB, both of which delivered rate decisions and provided policy updates on Thursday. Fortunately, both did just as expected, with the narrative coming from both central banks suggesting a more hawkish tilt to see off rising inflation. The BoE raised its Bank Borrowing Rate on Thursday for the second consecutive meeting, this time by 25bps (to 0.50%). You can find the BoE rate decision here. The BoE will undoubtedly be the most serious about nipping inflation in the bud. In the Monetary Policy Report released concurrently with the rate decision, the BoE said that it expects UK inflation to reach 7% in the spring before reversing course as the bank tightens its monetary policy. In contrast, even though the Eurozone experienced record high inflation in January (CPI of 5.1%, see here), the ECB decided not to raise its overnight bank borrowing rate from 0% in the common currency zone. However, ECB President Christine Lagarde did signal a more hawkish stance. You can find the ECB press release here. The more hawkish tilt by the ECB did contribute to ongoing weakness in the Eurozone government bond market. The benchmark 10-year German bund yield closed in positive territory on Monday for the first time since early April 2019, and then continued to increase ending the week with a yield of 0.21% (and yes, POSITIVE 0.21%!).


Rising energy prices, increasing price of oil

There was also plenty of discussion during the week on rising energy costs, especially in the UK. The annual cost of gas & electricity costs in the UK is projected to increase by 50% in the coming months (source: Cornwall Insight) to £1,897/year, a very material increase for the average Briton. Rising prices at the pump seem to be the main concern Stateside, although I believe the combination of Ukraine crisis and market volatility has pushed this off the front page for now, for which the Biden Administration should be grateful. Indeed, WTI crude topped $90/bbl on Thursday for the first time since 2014, ending the week at $91.92/bbl. The direction of travel is very clear. The financial media is saying that OPEC+ is not holding back on supply, but rather some members are struggling to even meet the quotas that were agreed at the last formal OPEC+ meeting several months ago. Higher prices of oil should increasingly encourage operators with fields that have higher lifting costs to come back on stream, which I suspect would include many US shale producers. However, as with OPEC+, supply can’t simply be turned on and off overnight. Oil prices, should they continue to escalate, will eventually become a drag on global economic growth, perhaps not jeopardising the (hopefully) end-of-pandemic recovery but certainly slowing it.


US payrolls for January

As mentioned already, additions to the US workforce in January – announced on Friday morning – were wildly in excess of economists’ expectations. I suppose this is good news as far as getting folks back to work, although the devil is very much in the details given the nuances of such job reports. You can find the US Bureau of Labor Statistics news release for January here. The large number of job additions in January, along with wage increases (Y-o-Y of 5.7%), added further fuel to the fire of inflationary concerns, causing the US Treasury market to tank Friday morning across the entire curve. How did the Fed dig themselves into this hole? And how in the world will the Fed navigate a soft landing with inflation seemingly running out of control?


Weekly Tables and Commentary


In global equities, Japan was the best performing market of the week, following a period of rather disappointing performance dating back to autumn 2021. All of the other indices aside from the Euro STOXX 600 were positive for the week. YtD, the best performing market has been the FTSE 100, followed by the MSCI EM index (emerging markets).

In US equities, stocks rallied on Friday in spite of yields spiking the same day. Once again, strong earnings from some much-watched tech giants seemed to stabilise US equities going into Friday, as markets rallied on the final trading day of the week. The tech-heavy NASDAQ Comp was the best performing market of the week, followed by the small cap Russell 2000. Volatility was heavy in select names this past week. For example FB shares fell 26.4% on Thursday, wiping out $237 billion of market cap, whilst AMZN shares rose 13.5% on Friday, adding $191 billion of market cap. I could not make this stuff up! Here’s a summary of where we stand as far as US equities.

The was no equivocating in the US Treasury market this week, or for that matter, in the UK and Eurozone government bond markets, either. Inflationary concerns are weighing large on all three economies, pushing bond prices lower as yields rise across the board. The yield curve in the US is staying surprisingly flat, and this could indicate that investors believe that inflation will be short lived or – more likely ­– that the Fed will overshoot and slow the US economy too quickly pushing the US into recession. Either way, USTs are not the place to be at the moment as the Fed must accelerate its tightening agenda.

As mentioned above, the US Treasury market is not the only government bond market feeling the effects of inflation. The table below illustrates 10-year government bond yields for Germany (Eurozone proxy), the UK and Japan. As you can see, the trends in each country / economic bloc are the same.

In safe haven assets other than US Treasuries, gold is showing some spine by becoming at least a respectable placeholder. The price of gold was up ever-so-slightly on the week. The US Dollar gyrated this week but ended weaker, with many currency specialists projecting that the Dollar is near its peak and is more likely to decline from this point forward. I’m not sure I completely understand the rationale given the Fed’s more hawkish tilt and the risk profile of the world at the moment, although by definition, one day these pundits will most certainly be correct. It is true, as depicted in the table above, that government bond yields are also rising in other developed economies. Perhaps this is a race to the bottom!

WTI crude powered above $90/bbl on Thursday, the first time since 2014, and did not look back, closing the week at $91.92/bbl. I discussed oil prices more thoroughly in commentary earlier in this update. Cryptocurrencies were again remarkably resilient given the volatility occurring in the traditional equity and debt markets, which I would find encouraging if I were an investor in the crypto asset class. Bitcoin was very strong on Friday, leading to a gain of 7.3% (using price Friday at 5pm EST) even as bonds were getting hammered and equities were all over the place much of the week before ending stronger. Someone tweeted that some of the wild stock gyrations (FB down 26.4% in a single day) resemble the most volatile price action of those cryptocurrencies often referred to as “shitcoins”. I couldn’t help to laugh because there is some truth to this comparison in these very strange and unsettled times.


In corporate credit, cracks are starting to become visible even as corporate bonds remain one of the few alternatives to equities offering (nominal) positive returns. Although default risk in the high yield segment remains subdued for now, the sharp rise in UST yields is rattling corporate bond investors as spreads widen and yields head higher. The first table below shows yields for corporate bonds, and the second one shows credit spreads



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