Market Commentary: Week to 29 March 2022

29 March 2022

Market News

Stock markets continued to enjoy the post-Ukraine rally last week, with notable enthusiasm for all things American and, especially, American technology stocks. Also coming back into favour are some speculative favourites, including cryptocurrencies. Recent announcements of stock splits by American technology companies have been greeted with extremely outsized responses, despite the fact that they generate zero economic value to shareholders. Alphabet (Google) enjoyed a $130 billion boost to its market value on the day of the announcement, Amazon saw an $80 billion boost for its stock split and, most recently, Tesla an $84 billion boost. Perhaps this simply reflects the fact that American retail buyers still have plenty of firepower, as they have been a constant positive for markets since the start of the year, even continuing to pour money in throughout the Ukraine crisis. The other constant positive has been stock buybacks by American companies, which are running at all-time highs. Unfortunately for investors, while these factors may support valuations for a while, neither of them contributes to economic growth or the enlargement of corporate earnings. At least the earnings expectations for technology companies have ticked up recently while, for the broader US market, they have remained flat over the last six months.

The bond markets made waves again, with a growing chorus of commentators now predicting recession, based on the sell-off in short-term bonds relative to their longer-maturity brethren. The consensus seems to be growing among bond investors that central banks have gotten so far behind the curve in controlling inflation that they will be forced to put the brakes on economic growth in order to contain it. It’s worth noting that central banks have spent the last year pouring fuel on the inflationary fire: while US inflation rose from 2.3% to 7.9% over the last year, the Federal Reserve added a net $1 trillion to the US financial system. Over the past two weeks, even as the Fed raised rates by 0.25% and talked tough on inflation, it added a net $50 billion.

Of course, the European Central Bank has continued with its asset purchase programme, and this week saw a new arrival, with the Bank of Japan committing to buy unlimited amounts of Japanese government bonds for three days in a row in order to suppress Japanese government bond yields. Another important support to the inflation argument is politics: recent surveys in the US show that inflation is now a far bigger concern for voters than any other issue, including the pandemic. This is evidently a concern for governments globally, as plenty of European governments, and also the Japanese government, have put plans in place to subsidise consumers against rising energy prices.

It’s been a while since market commentators have had to write about the risk of Covid, apart from to say that the impact of Omicron in the developed world has been far less than expected, but the Chinese government took very rigorous action this week in locking down half of Shanghai, the country’s biggest city and one which represents nearly 4% of China’s economy. This will inevitably lead to an even bigger slowdown in the Chinese economy, more supply chain problems in the western world and more persistent inflation at the factory gate. But the Covid risk that is really not priced in to markets is of a more severe Covid mutation. According to the conventional wisdom, each Covid mutation is less severe than the last but medical evidence suggests this could simply reflect vaccinations, boosters and acquired immunity. The risk still exists, therefore, for a more severe variant to emerge.

Stock Focus

Speculative fervour returned to the US technology sector when Nvidia, a manufacturer of computer chips used in gaming software, pledged to invest in the growth of its core business rather than in buying back its own shares. Nvidia shares jumped 8% on the news, adding to a 20% rally that had already occurred since the bottom of the market two weeks ago. The buying, which was mainly driven by American retail investors, spread beyond Nvidia to the broader technology sector, and the technology-heavy Nasdaq Composite Stock Index rose by 2% on the day. Analysts highlighted a recent uptick in earnings expectations for the tech sector, and suggested that investors are more interested in growth stocks than in interest rates.

Shares in Apple, the world’s biggest company by market value, rose by more than 2% after financial news service Bloomberg reported that the company is looking to sell iPhones via a subscription service. The proposal would make owning an iPhone similar in nature to owning a car via a lease agreement. Under the terms of the subscription, owners would be able to upgrade their devices from time to time. Apple shares have now risen for the last ten days in a row.

Shares in electric truck maker Nikola Corp jumped 10%, after the company announced that it had actually started manufacturing electric trucks at its factory in Arizona. The company described itself as being “laser-focused on delivering vehicles and generating revenue”. Nikola shares have risen by 49% since the market bottomed, but still languish more than 80% below their peak soon after listing in June, 2020. Nikola became briefly famous when its market value briefly exceeded that of Ford Motor Company, before its founder became the target of regulatory investigations.

Following hot on the heels of the UK’s regulatory onslaught last week, the biggest technology companies operating in Europe will face fines of up to 20% of global revenues if they infringe competition rules. Those rules include requirements for making messaging networks to connect to third party networks, letting users pick their own web browsers, and getting explicit consent from users to share their personal data.  The new rules will only apply to technology platforms generating over EUR7.5 billion in annual revenue and with at least 45 million monthly users.

Highlights

• Business activity surveys in Europe and America showed only a small impact from the war in Ukraine and, in some cases, no impact at all. Service sector activity in nearly all countries was surprisingly robust. However, these are at odds with the dire results of recent consumer and business confidence surveys.
• UK inflation continues to outstrip expectations, rising by 6.2% in February compared with a rate of 5.5% in January. Energy price inflation actually declined in the month, but was more than made up for by a sharp rise in food prices. Inflation is expected to peak in April at around 8%.
• The rise in US interest rates is having an unexpectedly large impact on the US housing market, with home sales in February dropping well below expectations. On their current trajectory, US house sales are set to fall by 20-30% by mid-year.

Calendar

• The US monthly employment figure is probably the most-watched piece of economic data in the world and, recently, it has been pointing to unexpectedly strong growth in the US labour market, despite the impact of Omicron. For March, however, economic forecasters are expecting the number of jobs created to have fallen significantly compared with the previous month, to 475,000. A particularly low figure could fan fears that the hawkish turn in monetary policy is already slowing the economy.
• Eurozone inflation is expected to have risen to 6.5% in March from 5.9% the previous month, with prices accelerating across all parts of the economy. After a long series of overshoots relative to expectations, markets will be relieved just to see inflation at or around the expected figure.

Important information

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