Investment Insights Notes from the Kitchen

Markets Shy Away From Hawkish Fed

  • Apr 28, 2022
  • Andrew Gillham

(Cover Image Source: Nicholas Cappello)

Investors took heed of the long-standing mantra “don’t fight the Fed” last week and sold down stocks after Federal Reserve officials warned interest rates will rise at a faster pace to try to tame the highest inflation in 40 years. The blue-chip S&P 500 and technology focussed Nasdaq fell 2.2% and 2.5% respectively.

Elsewhere China stocks were notable underperformers, the Shanghai composite declined 8.4%, as authorities extended lockdowns to prevent the spread of Covid and the regulator clamped down on livestreaming, another blow to some of its largest technology companies.

In a busy week for corporate earnings there were starkly contrasting fortunes. Netflix shares dived 35% in one day, wiping more than $54 billion off its market value, after it announced it had lost subscribers for the first time in a decade. The video streaming trailblazer blamed a range of factors for losing around 200,000 subscribers during the first quarter, including increased competition from rival platforms such as Amazon Prime, Disney+ and HBO Max, its withdrawal from Russia and the higher cost of living.

In a bid to slow the exit of more subscribers, Netflix expects to lose another 2 million in the current quarter, management revealed plans to launch a lower priced, ad-supported streaming service in the next year or two. It is also looking to crackdown on households sharing accounts and passwords. Netflix estimates more than 100 million of its accounts are being shared with others.

Consumer goods companies were amongst the winners, demonstrating that they could pass on higher costs without hurting sales. Heineken reported net revenues rose 24.9% in the first quarter to €5.8 billion, boosted by a strong recovery of demand from bars and restaurants in Europe as pandemic restrictions eased. The world’s second largest brewer, however, warned it will take a €400 hit from exiting Russia.

Nestlé also increased its prices by more than 5% in same period to protect operating profit margins from the soaring cost of raw ingredients, wages, energy and transportation. The largest markups were in North and Latin America where prices rose 8.5% and 7.7% respectively.

Just a week after launching a poison pill defence to block a takeover by Elon Musk, Twitter’s board made a sharp U-turn and acquiesced under shareholder pressure to agree a deal. While Musk is listed as the world’s richest man, much of his wealth is tied up in Tesla stock, he secured a $46.5 billion funding package with the assistance of Morgan Stanley. Musk, a prolific user of the platform with more than 83 million followers, has pledged to remove moderation and clean out “spam bots”.

Comments from the Federal Reserve Chair Jay Powell were the trigger for the worst one-day sell-off in markets since March on Friday. At an IMF meeting in Washington, he acknowledged “economies don’t work without price stability” and a half a percentage point interest rate hike is on the table for May. Powell’s message is now aligned to more hawkish policymakers who have been pushing for front loaded rate increases to take some of the heat out of inflation.

Raising interest rates without pushing the economy into recession will be a big challenge for central banks, especially in the UK and Europe. Consumer spending accounts for more than two-thirds of the UK’s GDP and households are feeling the pinch. Retail sales fell 1.4% in March and consumer confidence is at a near all-time low according to the monthly survey carried out by research group GfK.

Brent crude fell back sharply towards $100 a barrel on concerns that tighter monetary policy and the prolonged Covid lockdowns in China’s financial hub Shanghai will dent global economic growth and demand. There were also some improvement on the supply side. The number of active oil rigs in the US rose by 13 to 546, the highest in 2 years, and Libya’s oil ministry indicated that oil fields shut down by protestors should reopen within days. Supporters of the military strongman Khalifa Haftar have blockaded fields in the east of the country, seeking to pressure PM Abdul Hamid Dbeibah to step down.

TEAM Asset Management is a trading name of Theta Enhanced Asset Management Limited which is regulated by the Jersey Financial Services Commission.