Hawks Take Flight

(Cover Image Source: Rachel McDermott)

There were mixed fortunes for global stocks last week as central banks adopted much more hawkish stances in a bid to halt runaway inflation. There were also some big winners and losers from divergent corporate earnings reports.

The blue-chip S&P 500 and technology focussed Nasdaq fell 0.7% and 1.6% respectively over the week and closer to home, the FTSE 100, boosted by higher exposure to energy and financial stocks, gained 1.5%.

Quarterly earnings report kept big tech in spotlight last week with Amazon and Alphabet headlining the winners. Amazon’s share price jumped 13%, it’s biggest daily increase since 2015, after it announced profits of $14.3 billion in the fourth quarter on the back of record holiday sales, rapid growth its cloud division and a $12 billion gain from its investment in electric vehicle marker Rivian.

Shares in Google’s parent, Alphabet, also rose sharply after it reported unexpectedly strong search advertising revenues. The company is also planning 20-for-1 stock split to make them more accessible to retail investors. Alphabet currently trades around $2,800 per share.

On the other hand, Meta Platforms, formerly known as Facebook, and PayPal disappointed. Meta dived more than 26%, wiping more than $250 billion from its market capitalisation, the day after it reported CEO Mark Zuckerberg warned that the company’s apps, Facebook and Instagram, are losing traffic to rapidly growing competitors such as TikTok.

PayPal shares fell a similar amount after its earnings missed analysts’ forecasts and it cautioned inflation and supply chain issues are impacting consumer spending and payment volumes. The company also revealed that it identified 4.5 million illegitimate accounts.

The Bank of England, as was widely expected, raised interest rates by a quarter of a point to 0.5% last Wednesday. However, the decision was surprisingly a close call with four out of nine monetary policy committee voting for a half-point increase to combat multi-decade high consumer price inflation. Futures markets are now fully pricing in further rate hikes in March and May and another three in the remainder of 2022.

In the wake of Eurozone inflation accelerating at a record 5.1% in January, the European Central Bank also turned uncharacteristically hawkish at its first governing council meeting of the year. The ECB has pursued a negative interest rate policy since 2014 but President Christine Lagarde took a sharp U-turn away from previous guidance and refused to rule out interest rate increases this year.

The prospect of faster interest rate rises didn’t go down well in bond markets which suffered their worst drawdowns since the onset on the pandemic in March 2020. In the historically low interest rate environment of recent years, corporate bonds have pulled in money from investors searching for yield but as the tide has turned so quickly, markets have struggled to absorb the outflows. GBP investment grade bonds fell 5.3%.

Brent crude continued its ascent to $92 a barrel as geopolitical risk remained elevated. At a meeting last Wednesday, OPEC+ members took just 16 minutes to decide they will stick to the previously announced schedule and increase production from March by 400,000 barrels per day despite pressure from the US to do much more.

Cryptocurrencies had their best week of the year with Bitcoin and Ethereum gained 15% and 18% respectively. CoinDesk reported $71 million of net inflows into its bitcoin-focussed funds last week, the most since early December.