Financial markets are ending the week on a negative note as earnings from Apple and Amazon failed to offset concerns over rising inflation and interest rates.
Earnings season has been a dream for investors in recent weeks, coming just as we were seeing a wobble in the markets as mounting risks cast doubt over the economic outlook. Some fears were realised throughout earnings season, most notably supply issues weighing on the bottom line and ad revenues being negatively impacted by Apple’s data changes and the supply drag.
But until now, that has been more than offset by stronger results of the top and bottom line which has driven equity markets higher in recent weeks. But a combination of disappointing tech results and higher rates are testing investors nerves just as indices move back into uncharted territory.
Results from Amazon and Apple were the latest to surprise, and not in a good way, with supply and labour challenges forcing the former to invest heavily to avoid festive disruptions and the chip shortage heavily impacting the latter to the tune of USD 6 billion. And the fourth quarter is not going to be any easier for either company which explains the drop in after-hours trading.
That said, while some expenses may be more permanent, like higher cost labour, most of the challenges facing both companies are temporary and they will bounce back strongly. Apple is continuing to report strong growth and the fourth quarter is expected to be the best ever in terms of revenue. Amazon is investing serious amounts of cash which is never a bad thing for a company with its record.
Facebook reported earlier in the week and faces numerous challenges of its own, both in terms of ad revenues and on the political front. Changing its name to Meta will not solve its problems but it may help stop the non-Facebook components of the business from being tarred with the same brush. It also clearly emphasizes the focus for the company in the years ahead as it invests heavily in the metaverse that CEO Mark Zuckerberg believes is the future.
Can Powell succeed where Lagarde failed?
Disappointing tech earnings have also come in a week when rates have been rising which naturally weighs on sentiment at a time when growth is slowing and inflation becoming an increasing concern. Traders were quick to dismiss Christine Lagarde’s assurances after the ECB meeting, clearly taking the view that the central bank’s forecasts for inflation can’t be trusted and they’ll eventually be forced to hike a lot earlier than they anticipate as price pressures persist.
We’ve seen some big moves in euro area yields since the meeting which is continuing into the end of the week. But it’s not just Europe that’s seeing yields rising, the US is being caught up in it too. Tapering being announced next week has been priced in for some time, investors are now factoring in multiple rate hikes as well by the end of next year which may be a concern for policymakers at the Fed.
Until now, they’ve been keen to stress that tapering and rate hikes aren’t linked and, while that may be true, markets are still now pricing in an immediate transition from the end of net asset purchases to rate hikes. At least two are now expected by the end of next year, with the first coming in the summer as tapering draws to a close. We’ll see whether Jerome Powell has any more luck than Lagarde, whose views on the matter fell on deaf ears. A repeat next week poses massive challenges for central banks who may be dragged into tightening whether they like it or not.
Evergrande avoids default late in the day
On a more positive note, Evergrande made another offshore coupon payment late in the day but crucially just before the end of its 30-day grace period. The company has avoided default for now but it’s simply buying time and until a permanent solution is found, there’ll continue to be nerves on approach to coupon and repayment deadlines, as well as steep discounts on those holdings.
Further downside in store for bitcoin?
Bitcoin recovered strongly on Thursday after breaking below USD 60,000 the day before in a move that could have triggered a much steeper decline. While the recovery may have been encouraging as it moved back above here, it failed at USD 62,500 which was the first major test to the upside and would have produced a very bullish technical setup.
As it is, it’s rotated off that resistance level and is now falling back towards USD 60,000 which may suggest near-term pressures remain to the downside. A correction wouldn’t be the end of the world for bitcoin and I’m sure plenty of interest would appear again should it fall back towards USD 54,000 which would be roughly a 20% correction off the high. It could also see some support around USD 58,000 and USD 56,000 prior to this.
For a look at all of today’s economic events, check out our economic calendar: www.marketpulse.com/economic-events/
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