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 $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.
Oil could correct further despite Thursday’s dip-buying
Oil prices recovered strongly on Thursday after trading more than 2% down on the day for a second successive session. They’re a little lower so far today which may suggest that, despite early dip-buying, crude prices could still face a deeper correction after such a prolonged and substantial rally over the last couple of months.
Of course, the fundamentals remain very bullish for oil prices with the world in the midst of an energy crisis as winter approaches in the northern hemisphere. And OPEC+ appear entirely unwilling to do anything to alleviate these price pressures, which makes it highly unlikely that the group will raise monthly production increases from 400,000 barrels per day when they meet next week. With producers struggling to hit targets as it is, it may not just be a lack of will, although they do appear pleased with prices at these levels.
Reports that talks will resume over the Iranian nuclear deal next month may be weighing a little on prices, given the prospect for a large amount of oil to come back into the market, but an agreement is probably not close so it’s not going to alleviate current pressures. That said, it’s come at a good time just as the rally was looking very overcrowded so it may aid the correction.
Gold breaks lower as yields continue to rise
US yields are rising and the dollar is being lifted up in the process, potentially aided by some risk aversion we’re seeing in the markets on Friday. Higher yields and a stronger dollar is a terrible combination for gold, which is almost 1% down and on course to once again fall short of closing the week above the $1,800 handle.
While the yellow metal has arguably shown strong resilience this week in the face of higher yields, not typically something associated with gold performing well, it has generally been supported by softness in the dollar as yields outside the US have rallied aggressively.
The rise in yields is also associated with high inflation and interest rate expectations, but not a hot economy, rather than a combination of all three which we would typically see. Perhaps this is lending itself to gold remaining well supported. That said, it has broken a rising trend line that’s accompanied the rally this month, as well as recent support, which may point to near-term weakness with the next test of support coming around $1,770.
Further downside in store for Bitcoin?
Bitcoin recovered strongly on Thursday after breaking below $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 $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 $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 $54,000 which would be roughly a 20% correction off the high. It could also see some support around $58,000 and $56,000 prior to this.
