Investment Insights Notes from the Kitchen

Red April

  • May 10, 2022
  • Andrew Gillham

(Cover Image Source: Grant McCurdy)

There was little respite for global stocks as a combination of higher inflation and a weakening economic outlook continued to weigh on investor sentiment. The blue-chip S&P 500 index fell 3.3%, rounding out its worst April in 52 years.

The Euro Stoxx 50, Europe’s leading blue-chip index, declined 0.7%, recovering from a knee jerk sell-off on Monday morning by as 3%. The ‘flash crash’ was triggered by an error on Citigroup’s London trading desk and briefly halted trading in several markets. Sweden’s OMX 30 index was hardest hit, falling 8%.

Investors looking for earnings reports from the big tech companies to lead a market recovery were left disappointed. The prospect of higher interest rates has weighed heavily on the sector and the Nasdaq fell 13% in April, its worst monthly drop since 2008, extending its year-to-date losses to 21%.

Microsoft and Facebook’s parent, Meta, kicked off the first quarter earnings reports with a positive start. Microsoft’s revenue grew 18% to $49.4 billion, underpinned by 49% revenue growth at its cloud business, Azure. Upbeat CEO Satya Nadella also predicted the company would be resilient to an economic slowdown and corporate customers will continue to invest in systems to increase productivity. He emphasised “in an inflationary environment, the only deflationary thing is software.”

Meta shares jumped 18% the day after it announced a $7.5 billion profit, 21% lower than the same period a year ago, but well ahead of forecasts. Daily active users increased 300,000 to 1.96 billion but digital ad revenue was impacted by Apple’s recent privacy changes on its iPhones.

However, the optimism was short lived as earnings reports from others, headlined by Amazon and Google’s parent, Alphabet missed forecasts.

Amazon shares dived 14% on Friday, their worst 1-day fall since 2006, after the company reported its first loss since 2015. The ecommerce giant’s core digital retail business stalled as fewer covid restrictions enabled more consumers to shop at bricks and mortar stores whilst costs soared. In a tight jobs market, Amazon has been offering signing bonuses of up to $3,000 to attract delivery and warehouse workers and the average starting pay at US fulfilment centres has risen to $18 per hour.

Amazon also booked a $7.6 billion mark-to-market loss on its investment in electric vehicle manufacturer in which it holds an 18% stake. Rivian shares have fallen more than 60% this year as it struggles with supply chain constraints and production snags. It expects to produce 25,000 electric trucks and SUVs in 2022, half of what it forecast in the run up to last year’s IPO.

Alphabet’s first quarter earnings fell short of analyst expectations due to a big miss on YouTube ad revenue. The video site was a big winner during the pandemic but re-openings, and fierce competition from TikTok, have slowed inbound traffic. Alphabet shares fell 4% in the following trading session but it could have been much worse had it not also announced a $ 70 billion share buyback plan for this year.

Bond markets also fell ahead of interest rate decisions by the Federal Reserve and Bank of England. 10-year US Treasury yields briefly climbed above 3% for the first time in 3 years on Monday. Rate hikes by from both institutions are all but certain with policymakers ramping up their hawkish rhetoric in recent weeks as they scramble to regain control of their price stability mandates. The Federal Reserve is also expected to formally announce a wind-down of its balance sheet by selling up to $95 billion of assets a month.

In a turbulent week, oil was one of the few winners and Brent Crude rose by more 5% to $107 a barrel as the European Union prepared a new round of sanctions, which could include a ban on importing Russian oil before the end of the year. It would be very significant move given that Russia accounted for more than a quarter of the EU’s oil imports last year.

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