Investment Insights Investment Strategy

Stocks Shine Through Gloom

  • Aug 10, 2022
  • Andrew Gillham

Global stocks extended their rally, underpinned by better-than-expected corporate earnings. The S&P 500 returned 0.5% and the technology focused Nasdaq gained 2.2%, climbing to its highest level in 3 months.

Shares in PayPal jumped more than 9% on Tuesday after it reported revenue grew 9% year-on-year to $6.8 billion. However, it was the news that activist investor Elliott Investment Management had built a $2 billion stake in the digital payments company that highlighted the earnings presentation.

PayPal shares have fallen by around 50% year-to-date with revenues pressured by supply-chain disruptions and once-in-a-generation levels of inflation but under pressure from Elliott, it has implemented cost-cutting measures that will generate $900 million of savings this year.

Market volatility triggered by macroeconomic and geopolitical events has been a kind environment for commodities traders, including Glencore which reported profits more than doubled to a record $18.9 billion in the first half of the year. Glencore has significant exposure to coal prices which have soared since Russia’s invasion of Ukraine, rising from $134 a tonne and the start of the year to almost $400.

The bumper earnings will allow Glencore to pay a $1.45 billion special dividend to its shareholders and launch a new $3 billion share buyback programme.

The Bank of England raised its benchmark interest rate by 0.5% to 1.75% before warning the UK faces a long recession. The rate hike was fully priced in by markets ahead of Thursday’s announcement but Governor Andrew Bailey’s very pessimistic outlook for the economy was more extreme than expected.

The BoE forecasts consumer price inflation will rise above 13% in October, the highest since 1980, as average household energy bills are likely to swell to £300 a month when the regulator resets it price cap.

The governor acknowledged that household incomes face their biggest squeeze in 60 years, which will likely trigger a recession lasting for the next five quarters. He insisted the bank had no choice but to act assertively to try to reign in inflation despite the bank’s own forecasts that unemployment will climb to more than 6% by early 2025.

Futures markets are pricing another 0.5% rate hike by the Bank of England in September and for interest rates to peak at 3% early next year.

The US economy is already in a technical recession following two consecutive quarters of contraction but other indicators suggest otherwise. The monthly nonfarm payrolls report revealed 528,000 jobs were added in July, more than twice as much as expected, pushing the unemployment rate down to 3.5%, equal to the half-century low set at the start of the pandemic.

Whilst most asset prices have trended higher in recent weeks, energy prices have moved in the opposite direction. Brent Crude fell below $95 a barrel for the first time since March on the back of the rebound in Russian crude oil production, China’s covid lockdowns and concerns of economies falling into recession.

It has been a harsh 8 months for crypto currencies, highlighted by the collapse of the Terra (LUNA) token in May. A month later, Bitcoin was almost 75% lower than its all-time high of $67,734 set last November. However, there are signs that the worst of the ‘crypto winter’ may be over and Bitcoin nosed back above $24,000 last week, lifted by the news that Coinbase has partnered with BlackRock to give clients of the world’s largest asset manager access to crypto.

(Cover Image Source: Thomas Kinto)

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