- Stocks drop, with GS down 8% on poor earnings
- US economic activity falls amid omicron and inflation
- M&A activity booms: Microsoft buys Activision
- WTI off best levels after hitting 7-year high
Following on the weaker performance in Europe, US markets fell sharply at the open. The Nasdaq was again leading the declines as yields rose and crude oil remained near 7-year high, keeping inflation worries supported. The drop of 8% for Goldman shares also weighed on the Dow, as it and other top US banks failed to live up to earnings expectations.
But it is not all doom and gloom out there, because M&A activity is going well, and the ongoing vaccination efforts by western governments means the soft patch in US and global data could be short-lived. Indeed, the UK government has indicated further easing of Covid measures as infections slow down. I continue to favour the attractiveness of European equities over the US, as a result.
We saw further evidence of the US economy slowing down, although it didn’t stop the dollar rally as yields refused to move lower with investors convinced it will not deter the Fed from tightening monetary policy aggressively. The latest sign of weakness came from the Empire State Manufacturing Index which showed a BIG miss: -0.7 vs. +25 expected, with all its sub-indices also disappointing. It has NOT been a good period for US data. We have also seen Retail Sales, Industrial production, University of Michigan Consumer Sentiment, Jobless Claims, and Non-Farm Payrolls all disappointing.
The soft US data clearly suggests economic recovery has slowed down, because of omicron while soaring inflation is also eating into consumers’ disposable incomes. Last week, we found out that consumer prices rose to their highest level since the 80s at a whopping 7.0%, while producer prices also remained near 10% year-over-year. But with WTI crude climbing to $86, gasoline prices should remain elevated and further underpin inflationary pressures and undermine disposable incomes.
On a micro level, Goldman Sachs shares dropped after disappointing with its quarterly results. Its earnings of $10.81 a share was short of $11.76 estimated as operating costs surged thanks to workers demanding higher wages because of surging inflationary pressures. But thanks to its investment banking and wealth management operations, the company saw its revenues rise to $12.64 billion compared to $12.08 expected. The earnings miss means GS has become the latest Wall Street giant to disappoint after JP Morgan and Citigroup produced poorly-received numbers on Friday.
But it is not all doom and gloom. M&A activity, which hit a record volume of more than $5 trillion in 2021, looks unlikely to slowdown. Microsoft announced today that it will buy Activision Blizzard, best known for popular games like “Call of Duty,” in a $68.7 billion deal. The easy availability of cheap financing and booming stock markets should keep deal making underpinned for as long as yields don’t rise too much.
Economic and earnings highlights coming up later in the week
Wednesday
- UK CPI and speech by BOE Governor Bailey
- Canadian CPI
- Earnings: Morgan Stanley, P&G, Alcoa, Just Eat
- Australia employment report
- US jobless claims, existing home sales and
- Philly Fed Manufacturing Index
- Earnings: Netflix, American Airline
