Head of Equity Strategy
Summary: Alphabet and UPS delivered strong earnings overnight lifting sentiment on US equities helping Nasdaq 100 futures push above their 200-day moving average. Adding to the rebound is short covering which we see clear signs of among Saxo's clients. While the rebound coupled with a decline in the VIX suggest things are more calm the underlying dynamics of tighter financial conditions and inflationary pressures persist suggesting downside risks to equities remain high. In today's equity update we are also covering the negative outlook from PayPal.
Google and EPS earnings lift sentiment
Last night, Alphabet reported strong Q4 revenue ex-TAC and EPS figures beating estimates lifting shares in extended trading and they are up 11% in pre-market trading lifting sentiment across the board. Alphabet is also announcing a stock split with a 20-to-1 ratio which will make the shares more accessible for retail investors. The only negative thing to put on Alphabet’s earnings was the bigger than expected operating loss in the Google cloud business.
Besides strong earnings from Alphabet we got much better than expected Q4 figures from UPS last night, but more importantly the 2022 guidance on revenue at $102bn was above estimates of $100bn and the guidance on operating margin was 13.7% vs est. 13.2%. Higher revenue growth while expanding margins is something investors typically like and the outlook is also bolstering the view that demand looks strong in the coming quarters.
The recent earnings releases have pushed revenue growth to 3.9% q/q for the Nasdaq 100 and 3% q/q for the S&P 500 which is impressive annualized figures. However, only technology companies are able to lift earnings at the same speed whereas S&P 500 companies have actually seen earnings decline due to margin compression.
The earnings optimism has helped push Nasdaq 100 futures above its 200-day moving average seen by many retail investors as the inflection point or switch for when to get back into technology stocks. Closing above the 200-day moving average alone got increase risk-on short-term as retail investors step up their buying.
Short covering is the rebound fuel
Based on Saxo’s client behaviour from last week and this week we can see that a lot of the fuel during the rebound has been around short covering. Clients were accelerating their shorting of speculative growth stocks into the selloff on Thursday last week. But in several bubble stocks and other speculative growth stocks half of short positions were covered during Friday’s bounce and the short covering continued on Monday. This flow is ebbing now and thus the rebound is likely to lose speed.
While the VIX Index and the VIX forward curve have both changed in favour of less nervous equity markets and more risk-on, the underlying risks to equities persists with financial conditions expected to be tightened significantly over the coming quarter to cool off inflationary pressures. The fiscal impulse in the developed world is also declining putting extra downward pressure on growth. Our view is unchanged and which is that investors should continue to rotate portfolios into inflation hedges such as commodities, logistics, mega caps, semiconductors, cyber security, and India to reduce sensitivity to US interest rates.
PayPal shares down 17% in pre-market
The biggest negative surprise amid the earnings optimism was PayPal Q4 earnings showing lower volume and the Q1 guidance was a massive negative surprise with EPS of $0.87 vs est. $1.17 and the guidance on EPS for FY22 was $4.60-4.75 vs est. $5.23 spooking the market. At the same time the company abandoned its 2025 target on 750mn accounts. Part of the slowdown for PayPal is that the former parent company EBay is moving more and more payments away from PayPal, but people returning to physical stores is also reducing growth in e-commerce payments. The bulls on the stock will point to a lot of new account services such as high yielding accounts, pay-now-pay-later functionality, trading in cryptocurrencies etc., but for now PayPal has lost some confidence from investors sending the shares down 17% in pre-market trading. In Europe, the fast growing payments company Adyen has recently been hit by the slowing growth of PayPal which has made some investors questioning whether Adyen is also hit, but judging from investors’ reaction today to PayPal’s result suggest confidence in Adyen’s growth numbers is coming back.
Bond. Long Bond(s)
With real rates being too positive, we see three scenarios: Opportunity to lock in rates at cycle high, government overreach to keep the economy afloat or a complete reset of the economy.
Steen Jakobsen,
Chief Investment Officer
Is a bond bull market ahead? Inflation still poses a risk for investors, but the moment for increasing duration to your portfolio may be approaching towards the end of the year, when central banks might be forced to cut interest rates.
Althea Spinozzi,
Senior Fixed Income Strategist
The furious rate hike cycle has brought gains in the US dollar, but with stagflation risks in Europe and the UK and weakness in the Chinese economy, USD may have more room to run. But a strong dollar could also have repercussions for US growth, emerging markets and commodity prices.
Charu Chanana,
Market Strategist
With the cost of capital rising painfully, stagflation fears are back, illuminating the fragile state of the green transformation, while giving a tailwind to nuclear power, and threatening the growth of AI-related stocks.
Peter Garnry,
Head of Equity Strategy
With supply tightness not only in energy but all commodities, the momentum in commodity prices may continue, pressuring central banks to lower real rates. That could be a good setup for precious metals, including gold, silver and potentially platinum as well.
Ole S. Hansen,
Head of Commodity Strategy
As the pandemic showed, even the US Treasury can experience seismic shifts. With the government increasing the pace of issuing bonds to support fiscal spending, the complex Treasury market and regulatory constraints could spark a liquidity event.
Redmond Wong,
Market Strategist
The tide has turned for bonds. Given the current yields, bonds have become an attractive investment, with added benefits including lower risk than stocks, increased diversification and a steady stream of income unaffected by economic changes.
Peter Siks,
Investment Coach
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