Global markets were mixed on Friday, as US markets (S&P500 index +0.08%) ended the session flat.
US Bank stocks which have generally been stronger over the break, were weaker overnight as their quarterly results underwhelmed versus investor expectations. Stocks (particularly high valued tech stocks) that have recently been sold off were up as investors 'bought the dip'. European Markets (Stoxx 600 index, -1.0%) fell as hawkish US Fed remarks hurt global sentiment, and the European Central Bank joined the hawkish tone, with the ECB saying that they would take any measures to bring inflation back down towards 2%.
After a strong end to 2021 for most markets, 2022 has been a rough start. The weakness over the first 2-weeks of the year has been stemming largely from US Fed announcing their tightening of monetary policy with rate hikes coming in as early as March, with market now pricing in the potential for 3-4 interest rate hikes for the year, as the Fed becomes more hawkish to combat inflation. The US 10-year Treasury Yield has jumped +25% since the start of the year to 1.77%, with the flow on implications effecting global bond and equity markets.
While rising inflation is the main cause for concern, surging Omicron cases seeing daily case numbers surge to fresh record highs are not helping market sentiment either. The most recent US CPI (inflation) print for the month of December saw a +7.0% year on year increase, while core CPI rose +5.5% (the sharpest rate of increase since 1981).
Overall stocks sensitive to rising interest rates have been sold off, such has high value tech stocks and the NASDAQ (the technology focused US index) has slipped -5.4% since the start of the year.
Other equity markets have also started the year on the backfoot with the US S&P500 (-2.8%), Aussie ASX200 (-2.6%), New Zealand NZX50 (-0.3%), and European Stoxx 600 (-1.8%). The best performing sector has been financials which benefit from rising interest rates and banks have generally been strongly. We anticipated a more challenging year ahead in 2022 for stocks, particularly those trading at lofty valuations which are likely to re-rate downwards, reversing the benefits from record low interest rates. We forecast a big dispersion in terms of winners and losers this year, which should bode well for "stock picking" rather than passive market investing.
NASDAQ Technology Index 1-Year Chart:
Looking ahead, the global economy looks to be in sound position, with unemployment at low levels, but ongoing supply chain issues restricting growth and inflationary pressures will put some pressure on consumers. This can be supported by commodity prices remaining strong, particularly oil and iron ore as economic activity remains heightened.
Our gut feel on COVID is that with the low severity of the current omicron variant we are seeing most countries around the globe relying on their high vaccine rates and are less likely to impose as hard lockdowns to heavy restrictions. However, with people in Australia forced to self-isolate once infected is putting strain on some industries with temporary staff shortages. Locally, we see more or less the same for covid related restrictions over the next 6 months and hope for some easing in international travel restrictions by the end of the year (for vaccinated travellers).
We still believe in picking value stocks and investing into quality tangible growth with strong thematic growth drivers, as well as being wary of upcoming rate hikes putting further valuation pressure.
JP Morgan Chase (JPM:NYSE)
JP Morgan Chase (JPM) fell -6.2% on Friday despite delivering a strong set of number for the final quarter of 2021 which beat market expectations, reversing its gains it made in the start of the year as a benefactor to higher interest rates.
Earnings per share came in at $3.33, beating market expectations by $0.30, helped by a larger release of its net loan loss reserves of $1.8 billion. The cause of concerns is cost inflation for the business, which is set to partially offset the interest rate increase benefit looking ahead, and the next year or two may be more challenging than expected.
While there are some short-term cost issues and 2022 earnings would not realise loan reverse benefits like it has done in 2021, we anticipate medium-term to outlook to remain positive and remain BUY rated on JPM at current levels. While some volatility over a challenging 2022 is expected the bank should still be better placed to outperform the overall US market.
Australia & New Zealand Market Movers
The Australian market was down on Friday (ASX 200 index -1.1%).
All sectors were lower except for utilities, with Australian tech stocks leading losses continuing their descend fretting over rising interest rates. Tech heavyweight Afterpay fell -9.2%, down to a new 18-month low as its soon to be owner Block fell -6% over. Xero fell -5%, WiseTech falling -2.9% and Next DC down -2.5%.
Consumer Staples and Consumer Discretionary both hit hard as weak retail data was released for the month of December attributed to weaker foot traffic due to omicron outbreak.
The New Zealand market (NZX 50 index) edged higher on Friday up +0.2%.
Travel booking software company Serko jumped +4.8%, it is recovering from its sharp decline in recent weeks.
Gentailers which are also sensitive to higher interest rates were higher recovering from their recent sell-off, despite a note stating they are unlikely to make gains over the near-term due to the interest rate headwind.
Tourism Holdings had the largest fall down -3.9%, and is now down -11% from its mid- December peak when it announced the Apollo merger.
3 Things Markets will be Watching this Week
- Inflation data across the Eurozone and fourth quarter GDP data from China.
- US earnings Season kicks off with Bank of America, Proctor & Gamble, Netflix, Morgan Stanley, Intuit, Goldman Sachs, Alcoa, American Airlines and United Airlines among large caps scheduled to release results.
- Locally, Australia’s employment data and a number of quarterly production reports are also due in Australia including Rio Tinto, BHP, Woodside, Northern Star and Santos.