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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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  • Writer's picturetim@emorningcoffee.com

WEEKLY: Fed walks back risk markets

WEEK ENDED FEB 10, 2023


Have you noticed that AI (i.e. artificial intelligence) is the new “blockchain” for equities? Remember a couple of years back when a company mentioned it was “getting involved in blockchain” – or for that matter, cryptos, NFTs, or anything wrapped around blockchain technology – investors would immediately bid the shares up? Companies with “boring” P/Es were immediately awarded with growth P/Es, and those companies which already had growth P/Es all of a sudden had even ridiculously higher P/Es. The best I can recall, most of this turned out to be folly, and many stocks touting blockchain as their future crashed to earth.


Today, it’s all about AI, certainly much more influential and immediate than blockchain. There is little doubt that AI will be very important for many companies in the years ahead. However, the question investors must ask before awarding a company that mentions this acronym with a higher P/E is simply “how much does it really matter for your business?” For companies that are being shaped as we speak by AI – like MSFT and GOOGL, both of which are embedding AI in their respective search engines – demonstrating the power of AI is positive, but flubbing it is detrimental. Microsoft presented its AI-driven solution ChatGPT brilliantly mid-week as far as being incorporated into its little-used search engine Bing (MSFT +1.8% WoW), whilst Alphabet blew it in a demonstration of AI-driven solution Bard in its ubiquitous Google search engine (GOOG – 9.8% WoW).


What else can cause a stock to increase at the moment aside from strong earnings, raising future guidance, or uttering the words “artificial intelligence? Two things come to mind that have been very effective this round of earnings:


1. Announce job cuts, the more the merrier; and / or

2. Authorise a gigantic stock buyback programme (or increase the existing authorisation).


I wrote about my view of this round of earnings in an article in EMC mid-week, that you can find here.


AI aside, market sentiment this week was mostly shaped by the Fed talking heads, which were out in force to add weight to Mr Powell’s post-FOMC comments about the Fed’s ongoing commitment to tackle inflation. I find Chairman Powell fairly straight-forward and bland when he speaks, but it seems he often says one thing and the markets hear another. Following last week’s post-FOMC meeting which fuelled further “risk-on” sentiment, a parade of Fed officials ­– including a second round from Mr Powell in an interview with Dave Rubenstein (soft but worth watching, 38 minutes, access here) – were sent out on the talk-show circuit to ram home their hawkish approach. To be fair, the comments of the various Fed officials were effective in cooling risk appetite. Their comments also sent UST yields sharply higher across the curve, meaning that equities suffered with the NASDAQ getting hammered the hardest.

Investors also continue to focus on earnings, earnings, and earnings, with 61 more S&P 500 companies releasing earnings this week and a slew others expected in Europe. I thought earnings this week continued to be equally mixed – some good, some bad, but no definitive direction worth betting on. Nonetheless, investors feel more positive, so I recognise I am in the minority.

MARKETS
  • Global equities were mixed this week, with the FTSE 100 delivering the best performance of the week and the MSCI EM (emerging markets) index – which is suddenly experiencing headwinds from a stable USD – the worst

  • Fed-speak finally did in the UST market, as prices fell and yields rose around 20bps across the curve. The yield curve remains sharply inverted now, with the 2y-10y at negative 76 bps

  • US equities were generally weaker, with higher yields on USTs not surprisingly affecting the NASDAQ most perversely

  • The USD seems to have rediscovered its mojo and was slightly stronger on the week. The Dollar is now flattish YtD with usual knock-on effects into other currencies and Dollar-linked commodities

  • Oil was the big mover on the week, given a boost by the announcement towards the end of the week that Russia would cut its production and OPEC+ was – perhaps not surprisingly – unwilling to plug the supply gap. The price of WTI crude barrelled ahead 8.7% this week.

  • Bitcoin faded as the gloss came off risk assets but is still up 30% YtD. Why? No idea – I’m the wrong person to ask!

Below is a summary of markets for the week.


WHAT’S COMING THAT MATTERS
  • Economic data: Most in focus this week in the US will be the release of January CPI on Tuesday. January CPI for the U.K. will be released the following day. January PPI and retail sales will be released for the US on Wednesday, and UK retail sales for January will be released on Friday. We will also get 4Q22 GDP for the Eurozone on Tuesday.

  • S&P 500 earnings: 61 additional S&P 500 companies will report earnings this week, including: Coca-Cola, Kraft Heinz, Cisco, Airbnb, John Deere, Marriott and Shopify. It is a big earnings week for non-US companies, too.

  • Upcoming central bank monetary policy meetings:

    • Federal Reserve – Mar 21st-22nd and May 2nd-3rd

    • Bank of England – Mar 23rd and May 11th

    • ECB – Mar 23rd and May 4th

    • Bank of Japan – Mar 9th-10th and Apr 27th-28th

THE TABLES

Global equities


US equities


US Treasuries


Corporate bonds (credit)



Safe haven and other assets


_________________


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