Week ended Oct 21, 2022
TRUSS SNAPS…SNAP SNAPS…YEN (ALMOST) SNAPS
“Inflation is known to shoot up like a rocket and then come down like a feather.” – Patrick Harker, President of the Philadelphia Fed (non-voting member of FOMC) this week
The headline of the weekly about sums it up, aside from noting that US equities had their best week in many.
(Former) PM Liz Truss was finished off this week although the writing had very much been on the wall,
The Yen fell to below ¥150/US$1.00 late in the week before staging a slight late-week rally, and
SNAP’s advert revenues disappointed, causing the stock to fall 28% on Friday.
Before I jump into markets, let me cover a few other things – I can’t resist.
Firstly, it’s nice to be back in London this week, where I had a front-row seat to watch in real time the political drama that has gripped the U.K. now for several weeks. It was indeed PM Truss’ final days as PM as her government imploded, and she finally pulled the ripcord herself on Thursday. Ms Truss was undone by a combination of the early announcement of an ill-advised fiscal stimulus overhaul followed by a rapid erosion in confidence in her leadership within her own Conservative party. Markets puked on the fiscal plan dreamt up by her first Chancellor of the Exchequer, and this ultimately forced the grown-up in the room – the Bank of England – to step in and steady the proverbial ship. Now what? Will the Conservatives be able to choose a new leader, or will they give into Labour demands and call a general election? It looks like there will be no general election, but nevertheless, the bid-ask spread on the length of Conservative leadership in the U.K. is almost certainly 0-2 years. Labour seems to currently have overwhelming support of folks in the UK given the disastrous run of the Conservatives governing (if you can call it that), including a string of three different Conservative PMs in only six years. Of course, the passage of time can change sentiment, but there’s little debate that the Conservative Party has now dug itself into a very deep hole.
As far as I am concerned, the complete lack of stability in the U.K. government since BREXIT speaks volumes about that decision in 2016. From an investor’s perspective, fortunately the Bank of England has remained above the fray, staking the high ground and sticking to its guns in spite of instability in markets attributed to Ms Truss’ fiscal plan. The BoE rescued U.K. pension funds a couple of weeks ago by stepping in and becoming a buyer of last resort of long-dated Gilts following the government’s fiscal mis-step and has drifted off-script only slightly in terms of pushing out its quantitative tightening programme a few weeks and slightly modifying the scope. In spite of the turmoil, U.K. financial markets have largely stabilised over the last week, with long-dated Gilts rallying (thank you BoE), Sterling stabilising (more or less), and the FTSE 100 rallying to close the week. The U.K. is a medium-sized and not terribly (economically) relevant island country post-BREXIT that has grabbed the world’s attention the past few weeks for all the wrong reasons.
This brings me to earnings. Investors have been laser-focused on this round of earnings, and my early take is that the results overall have generally been better-than-expected. Recall that most investors seemed to view consensus analysts’ expectations as far as 3Q revenue growth and earnings as overly-ambitious, but reality might be siding now more towards the analysts after all. Not all results have been positive, but many of the big names have been. The week opened with solid earnings from Bank of America (BAC, +10.3% WoW) and Goldman Sachs (GS, +8.3% WoW), and was followed by better-then-anticipated results from the like of United Airlines (UAL, +14.0% WoW), American Airlines (AAL, +4.6% WoW), Netflix (NFLX, +25.9% WoW) and P&G (PG, +7.9% WoW ex-div). Better-than-anticipated results seemed to have stabilised equity markets, although the inflation narrative (i.e., “higher & longer”) did cause bond investors to be punished again with the yield on the 10y UST increasing 21bps WoW to close at 4.21%. Higher yields have continued to keep a lid on the recovery (or even stabilisation) of technology stocks, although the NASDAQ was on fire this week, up 5.2% and cutting its YtD losses to 30.6% (ouch!).
The solid performance of the NASDAQ and many tech names this week occurred in spite of mixed results from TSLA (TSLA, +4.6% WoW) and poor advert sales from SNAP for its 3Q22, announced Thursday after the bell. In the prior two quarters, results from SNAP would have spread like a wildfire throughout the entire tech sector, but suddenly, we seem to be on firmer footing. Solid earnings from NFLX certainly helped, too. Since earnings from tech companies seem to garner the most attention (and we have the FAMAG companies all reporting this week), it is the tech sector that is perhaps driving the improvement in sentiment. You can find the Refintiv weekly update for the S&P 500 for the week ended October 21 here.
There’s not much to say about the Yen, aside from my view that intervention in the FX market by the Bank of Japan will not work simply because there’s not enough firepower at the end of the day. Yes, Yen managed to rally on Friday after popping above ¥150/US$1.00 mid-week, but still, the overwhelming message from markets is that the BoJ needs to change its monetary policy by backing off its overly accommodative stance which is crushing the Yen. When will this break? Soon, I would guess, although more broadly, US Dollar strength is also not helping US multi-national companies. In FX, it feels like a race to the bottom.
One final note – China’s National Bureau of Statistics did not release 3Q22 GDP this week as expected, saying the release was deferred. The release of GDP would have occurred during the multi-day 20th National Congress of the Communist Party, led by President Xi Jinping. The deferral certainly didn’t help confidence in the slowing and increasingly opaque Chinese economy.
MARKETS THIS WEEK
It was a good week for most risk assets as you can see in the table below.
There was a mix of up and down sessions in global equities although the end result (save Asian equities) was solid. However, US Treasuries took another beating – it’s “inflation, inflation, inflation” with nowhere to hide! Corporate bond yields in both investment grade and high yield pushed higher, not surprising given the increase in yields in underlying government bonds, but credit spreads actually tightened. I talk a lot about signals of what may lie ahead from the credit markets, but the reality is that even though credit conditions are tightening, investors so far seem to fear little as far as corporate defaults. In a similar vein, Bitcoin has remained remarkably resilient, at least compared to some equity and bond indices.
WHAT MATTERED THIS WEEK
I am not going to elaborate further on news this week because I mostly covered them in the summary. The key drivers were political instability in the UK (not to mention record-high September inflation, announced Weds - here) and corporate earnings.
Below are some of the key data releases and other financial events that matter for the weeks ahead.
S&P 500 earnings –It’s a big week for S&P 500 earnings, with the FAMAG companies all releasing earnings, as well as some large names like VISA, , Mastercard, Merck, Eli Lilly, Intel, Chevron, Exxon Mobil, Kraft Heinz, Ford, GM, GE, McDonalds, Caterpillar and AON. Alongside the FAMAG giants, smaller but much-watched tech companies including Shopify, Spotify and Pinterest all release their results. In total, 163 S&P 500 companies will report earnings this week.
Mid-term elections are approaching in the US, slated for Nov 8th. Republicans seem to be chipping away at the Democrat's advantage.
The Conservative majority will select a new Prime Minister by the end of the week, with Rishi Sunk the odds-on favourite. Look for Boris Johnson to try a comeback, too. It will be another entertaining week in U.K.politics.
As far as economic data, the focus on this side of the pond will the ECB rate (and other monetary) decisions on Thursday. Ahead of this, we will get some PMI data for the Eurozone, alongside retail data and 3Q22 GDP from China (should it be released on time). The BoJ will release its monetary policy decision on Friday, but the expectation is “more of the same.”
Upcoming central bank meetings (and last one of year):
ECB – THIS WEEK ––> Oct 27th (next and Dec 15th)
Bank of Japan – THE WEEK ––> Oct 27-28 (next Dec 19-20)
Federal Reserve – Nov 1-2 (next Dec 13-14)
Bank of England – Nov 3rd (next Dec 15th)
Corporate bonds (credit)
Safe haven and other assets