Weekly Update – 7 February 2022
Last week was a very choppy, but ultimately positive week for global stock markets, with the Japanese and US markets delivering the best gains. The US stock market had an earnings driven rollercoaster, dragged lower on Thursday by Meta suffering the biggest daily market cap fall ever for a company and then boosted on Friday by Amazon having the biggest rise in market cap ever. Throw in rate hikes in the UK, combined with generally hawkish rhetoric from global Central Bankers in the face of higher inflation, and it all made for a very lively week. The prospect of higher interest rates was acutely felt in the government bond markets which fell heavily last week and it was once again commodity markets which were the beneficiaries of higher energy inflation. This week looks to be much quieter, earnings season is still in full swing, but there aren’t index heavyweights reporting and the economic calendar is more sparse, with the US inflation number on Thursday likely the key data point.
Last Week
- Global stock markets rose led by Japan and the US.
- Energy continued to be the best performing commodity sector
- The Bank of England raised rates and signalled a faster pace of rate hiking.
- Bond futures markets priced in a more aggressive path of rate hikes.
- Bond markets sold off, with government bonds bearing the brunt of the selling.
- Commodity markets continued their climb, helped by a 6% weekly rise in the Oil price.
This Week
- It’s a much quieter week than last.
- US Consumer Price data is released on Thursday, with consensus estimates looking at a 7.3% number. UK growth data (GDP) for the 4th quarter is released on Friday.
- It’s also a busy week for earnings, with 83 companies in the S&P 500 reporting and 89 in the Euro Stoxx 600. Of note, we’ve got BP reporting on Tuesday along with Tui and Pfizer. Disney, Uber and GlaxoSmithKline are on Wednesday and AstraZeneca, Unilever, Coca-Cola and Twitter are on Thursday.
Last Week’s Highlights
Global stock markets enjoyed a positive week but it was anything but calm, with some big movements in US technology stocks in particular. Facebook owner Meta Platforms was perhaps the highest profile company to miss on earnings last week and fell by 26.4% on Thursday alone. This wiped a record $232 billion off its market capitalisation in one day after reporting lower than expected earnings and revenue number, with the main concern in the market around the fact that daily active user numbers slowed to their first quarterly decline ever. Paypal was another reasonably high profile earnings miss, with this stock declining by 22.9% on the week. However, a 9.5% gain on the week (and 13% of this coming on Friday alone) from index heavyweight Amazon helped boost US stocks after a big earnings beat. Amazon was helped in no small part by its investment in electric vehicle maker Rivian and also by news that they’d be increasing the cost of their Amazon Prime membership in the US for the first time in 4 years; to $139 from $119 annually. This helped the US market to a 1.6% gain on the week and the global index of shares to a 0.7% gain on the week.
Other regional markets were generally fairly strong, with the exception of Continental European shares which fell by 0.6%. The Japanese market was up by 2.7% last week and was the best performer of the majors; bouncing back from over-sold levels amidst reassurances from the Bank of Japan that it had no plans to modify its easy monetary policy stance as well as reports that the nation might soon ease its travel ban for non-resident foreigners. Emerging markets continued their rise, up by 1.3% on the week, whilst the UK market was up by 0.6% on the week. Within the UK market, performance was once again driven by the Energy sector, with Shell up by 7.5% on the week as 4th quarter profits hit their highest in 8 years and the company announced an $8.5 billion share buyback as well as a 4% rise in its dividend.
At a global sector level, energy was once again the best performing sector last week; up by 4.2% on the week which takes gains for the year to 17.4%. This has much to do with the rise in the oil price, with WTI oil rising by over 6% in price last week and both WTI and Brent Crude oil now trading above $90 a barrel. This is the highest that the oil price has been since 2014. Banks and Financials also had a good week (both up over 3% on higher market interest rates) as did Consumer Discretionary (helped largely by the gain in Amazon). Industrials and Utilities were amongst the weakest sectors in a week where the Growth style beat the Value style for one of the first times this year, to help claw back some losses and be just 10% behind its counterpart for the year-to-date.
The bond market endured a pretty unpleasant week and much of that was driven by rising expectations of rate hikes and a strong jobs report from the US economy. The Bank of England raised interest rates for the second month in a row (to 0.5%) and combined this with a forecast that inflation could hit 7.25% in April. On top of this, 4 of the 9 members actually voted for a 0.5% rise (instead of the 0.25% hike that actually came).
The change in direction put some panic into the bond futures markets, which by the end of the week were pricing in a further 5 interest rate hikes for the year to take base rates to as high as 1.75% by year end. The mood of the bond market wasn’t helped by the European Central Bank meeting which quickly followed the BoE’s, with Christine Lagarde saying that inflation risks were “tilted to the upside”; CPI in the Eurozone is currently running at 5.1%. This led to rate hikes being priced into the European bond market this year as well. The US jobs data on Friday was the final driver of the increase in bond yields, with the report showing a surprising gain of 467,000 jobs in January (roughly 3 times consensus expectations) and a big revision to the December number as well (revised up to 510,000 new jobs from the 199,000 number that came out in early January).
For the week, UK government bonds fell by 1.6% and US Treasuries fell by about 1%. UK Corporate bonds were amongst the hardest hit, with this broad index down by 2.35% on the week, which takes losses for the year-to-date in these markets to just shy of 5%. UK 10 year bond yields closed out the week yielding 1.41%, whilst their counterparts in the US finished Friday yielding 1.91%. This marks a rise of 44 basis points and 40 basis points for the year-to-date respectively. UK 10 year bond yields are now at their highest levels since November 2018, but the most aggressive rise has come in shorter dated bond yields, with the UK 2 year bond yield at its highest level since April 2011. This has made for a flattening of the yield curve, with the UK 2s10s curve now just showing 15 basis points of steepness (down from 80 bps last summer) and the US yield curve showing just 60 basis points of steepness; down from 158 basis points in March of last year. These are important metrics as the yield curve is often seen as a good predictor of recession.
Commodities markets were once again on the up, with the Bloomberg Commodity index rising by 1.2% on the week which now takes their gains for the year to over 10.5%. Nearly all of the individual commodities which make up the index are up this year, but the outsized gains have all come from the energy complex.
Asset Returns
Equities & Oil: returns are all in base currency, save for Global and Emerging which are in GBP. Bond returns are all shown in GBP. Gold in GBP. Source Bloomberg.
Oil continued its rise last week, with the price of WTI Crude now above $90/barrel and at its highest level since 2014 having risen by over 20% so far this year.
