Market Update February Monday 7th 2022

Meta’s (Facebook) share price craters on a weaker earnings outlook

It has been a volatile week for markets, as a four-day rally in US equities was cut short on Thursday as Meta’s (Facebook’s parent company) share price fell by over 26% in afterhours trading on Wednesday, following the release of disappointing earnings guidance and a decline in its active user base. This wiped a massive $230 billion off its valuation in a single day, demonstrating how much more sensitive investors have become to earnings results of richly valued companies, in an environment where interest rates are expected to rise.

As of 12pm on Friday, London time, US equities were up 1.0% over the week, with US technology stocks rising 0.8% despite suffering losses of 3.7% on Thursday alone. Overall earnings results were mixed, with Alphabet (Google’s parent), Amazon and Snap, a direct competitor to Meta, all beating earnings forecasts. However, Paypal, the digital payments company, also suffered sharp losses as it warned that many of the new customers accumulated during the pandemic have not become active users of its service, guiding towards a weaker earnings outlook than previously thought. Its share price fell 25% on the news and by the close on Thursday was down by 30% from its midweek peak.

European stocks, having not benefitted from the rally as much at the start of the week, were trading lower by 0.5% as of 12pm on Friday. Whilst UK equities, having a low exposure to technology and a much higher exposure to financials and commodity stocks, were up 0.8%. Japanese equities, trading on much lower valuations to the US, finished the week 2.9% higher, whilst Australian stocks rose 1.9%. Emerging markets rose 1.6%, with Hong Stocks playing catch up, rising 4.3% after the Lunar New Year three-day public holiday.

German bund yields rise into positive territory for the first time in over two years

Yields on government bonds, which move inversely to price, gently rose over the week, with the 10-year US Treasury now trading at 1.82%. Perhaps more strikingly, German bunds rose into positive territory for the first time in over two and half years as European inflation exceeded expectations, coming in at 5.1% for the year to the end of January. As inflation is a year-on-year comparison economists had expected a decline, but after stripping out food and energy, although it fell back to 2.3% from 2.6% the month before, this was still higher than forecasts, with many economists having pencilled in a figure beneath 2%. The president of the European Central Bank (ECB), Christine Laggard, at a press conference on Thursday declined to rule out raising interest rates this year. Markets are currently pricing in two rate hikes by the ECB by the year end which, if borne out, may bring about the end of negative interest rates in the European Union.

Bank of England hikes interest rates to 0.5% against rising inflationary pressures

As widely expected, the Bank of England increased interest rates to 0.5% on Thursday, in the face of escalating inflationary pressures. This was in the same week as the energy regulator announced a 54% increase in the price cap for energy bills, with a further increase forecast for October. This is on top of a 1.25% increase in National Insurance contributions due in April to fund further expenditure on the NHS. The squeeze on household expenditures has arrived.

Crude oil exceeds $90 a barrel

The gold price climbed 1.4% this week, now trading at $1,812 an ounce. The copper price also rose, trading at $9,868, an increase of 3.9%. Crude oil rallied by a similar amount, rising by 3.2%, with Brent crude now trading at $92.9 a barrel and US WTI (West Texas Intermediate) $92.1. Whilst iron ore fell slightly, dropping 0.8%.

Latest US employment figures due out later today

US employment figures are due out today at 1.30pm London time, with 125,000 new jobs expected to have been created in January in the non-Farm payrolls. This has gradually been revised down following the very weak private sector payrolls number released on Wednesday by ADP, with the number of jobs falling by 301,000 versus forecasts of a rise of 180,000. This has been attributed to the spread of the Omicron coronavirus, to which markets are largely looking through as the virulence of the variant has increasingly been downplayed. However, whilst the US Federal Reserve says it remains data-dependent as to its plans for quantitative tightening and interest rate policy, it remains an important indicator.