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Weekly Market Commentary


Week to 17th February 2023


Market News

Improving Global Purchasing Managers’ Index (“PMIs”) data and a much better-than-expected employment report have recently given investors new confidence that the economy can avert a near-term recession, boosting market sentiment and stock prices. Meanwhile, the US Federal Reserve (“Fed”) has remained largely steadfast in its hawkish messaging, increasing the likelihood of additional 0.25% rate hikes in both March and May. However, the major benchmarks ended lower in a week with relatively few important economic releases or other concrete drivers of sentiment. Sector performance was relatively uniform within the S&P 500 Index, with energy stocks being the notable upside outlier and communication services shares the prominent laggard. Statements from Federal Reserve officials appeared to send stocks in opposite directions on Tuesday and Wednesday. Stocks rallied Tuesday, after Fed Chair Jerome Powell, in a question-and-answer session at the Economic Club of Washington, repeated an earlier reference to the disinflation process having started. Some investors had worried that the major upside surprise in the January payrolls report, released the previous Friday, might cause Powell to change his tone. However, a series of apparently hawkish comments from other Fed officials the following day seemed to send stocks back lower. The yield on the benchmark 10-year US Treasury note increased solidly over the week as investors appeared to continue digesting the previous week’s strong January payrolls report. The yield curve inverted further - Bloomberg reported that two-year Treasury yields moved to their highest level over 10-year yields in four decades - as fears grew that the Fed would need to push the economy into recession in order to tame inflation. This week, attention will shift to a slew of inflation data for January. After a string of months of promising disinflation progress, January Consumer Price Index (“CPI”) will likely show a bounce in headline inflation due to higher energy prices and persistent owners' equivalent rent inflation. Manheim data last week also showed that used car prices spiked in January, breaking a trend of sharply falling auction prices and warning of a turn in a major contributor to lower core inflation in recent months. Other data also show price pressures unwinding convincingly; pricing indicators from the manufacturing and services PMI surveys have declined sharply since mid-2022, down to a combined value of 56 from a peak of 85 last March. The disinflationary wave has room to run, but progress won’t be linear and inflation data in the very near term could plateau or even turn higher. Still, gathering evidence on a broad weakening of economic growth and inflation should soon lead the Fed to reverse course. For investors, it’s also important to take a longer-term view amidst shifting economic data and position portfolios for the eventual return to a slow-growth and low inflation economy.


Markets Snapshot - at 09:12am GMT 16/02/23

Stock Focus

The most significant stock-specific event for the broad benchmarks was a plunge in shares of Google parent Alphabet, which lost roughly $100 billion in market cap on Wednesday. The shares plunged after Reuters reported that Google’s new artificial intelligence (“AI”) chatbot, Bard, mistakenly identified the first satellite to take a picture of an exoplanet in its first public demonstration on Monday. The recent debuts of rival chatbots, such as ChatGPT and Perplexity, have also raised concerns for some investors about Google’s ability to maintain its dominance in internet search and AI. Microsoft has invested heavily in ChatGPT creator OpenAI and unveiled a prototype of the two companies’ combined search engine on Monday. The Walt Disney Company reported an 8% improvement in sales to $23.5 billion, while net income from continuing operations jumped 11% to $1.3 billion. The Disney+ streaming service, which first launched in 2019, reported a $1.5 billion loss. Subscribers were down 2.4 million at 161.8 million, although the fall was not as sharp as some analysts had feared. However, many focused on news that 7,000 jobs worldwide are due to be axed, as part of a group-wide overhaul intended to cut costs and turn around the US entertainment giant's streaming business. The overhaul, unveiled by newly-returned chief executive Bob Iger, will see Disney restructure into three core units: entertainment, covering film, TV and streaming; sports-orientated ESPN; and Disney parks, experiences and products. Around 4% of the global workforce will be affected by the job cuts that Iger hopes will eventually save around $5.5 billion. Shares in Adidas fell 11% in early trade on Friday after the sportswear giant issued its fourth profits warning in less than a year after markets closed on Thursday. The German firm said ending its partnership with controversial rapper Kanye West was set to wipe millions off annual profits. It ended the ill-fated relationship last year, after West - who designs trainers under the Yeezy brand - caused international uproar by posting a series of anti-Semitic comments on social media.

Stocks to watch over the next 7 days

Lloyds Bank

The bank is expected to report strong earnings but loan activity may have weakened in the final quarter

When Lloyds updated the market on trading for the nine months to September 2022, there was no hint of the turmoil which was about to erupt in financial markets or the sudden spike in borrowing rates.

Higher rates are generally good for banks, but shocks to the system aren’t which means Lloyds’ fourth quarter and full-year results on 22 February will be closely watched by the market. It will be instructive to see how companies and consumers reacted to the higher interest rate environment and whether Lloyds’ loan book took a knock in the final three months of the year.

After its third-quarter earnings beat expectations, Lloyds raised its full-year net interest margin and return on equity targets, and analysts expect chief executive Charlie Nunn to announce pre-tax profits of more than £7 billion as well as, potentially, a sizeable share buyback given the bank’s strong capital position.

Rolls-Royce

A £2 billion disposal programme was completed in September improving the balance sheet

At the start of 2022 analysts were pencilling in over £400 million of full-year net profit for Rolls-Royce but that has since collapsed to £57 million.

Despite this gloomier earnings situation, the shares have gained more than 25% over the past three months suggesting optimism over the recovery potential for the business. In November the company maintained guidance and noted large engine flying hours were up 65% year-to-date.

Investors will be keen to hear how 2023 is shaping up with tailwinds from a China reopening and increased defence spending.

Nvidia

Forthcoming results could be a major test for the recent share price rally

From chips shortage to a supply glut, things have changed rapidly in the semiconductors space in recent months and investors will be watching how this may have impacted Nvidia's earnings when it reports on 22 February.

Consensus already anticipates a 21% year-on-year decline for sales to $6 billion and 38% drop in earnings per share at $0.81 respectively. Yet its share price has surged 50% so far this year as investors have been flocking to stocks that were heavily sold off in 2022. This share price momentum could run out of steam if Nvidia delivers a downbeat outlook statement.

Home Depot and Walmart

The two US companies should provide insight into consumer confidence

Next week will hopefully give us an idea of how positive middle America is feeling about life as we get reports from two of the country’s most iconic retailers.

DIY chain Home Depot posts its latest results on 21 February, with analysts forecasting earnings per share of $3.27 for the fourth quarter against $3.21 previously and $16.63 for the full year.

However, the firm’s 93-year-old, billionaire founder Bernie Marcus has hardly endeared himself to younger customers, claiming ‘nobody works any more’ and ‘woke people have taken over the world’.

The same day, the world’s biggest retailer Walmart is expected to post earnings per share of $1.51 for the fourth quarter and $6.09 for the year, a drop of 5% on the previous year.

UK UPDATES OVER THE NEXT 7 DAYS

FULL-YEAR RESULTS

17 February: Allianz Technology Trust, NatWest, Segro

21 February: HSBC, InterContinental Hotels, Standard Chartered

22 February: Conduit, Hochschild Mining, Lloyds, Primary Health Properties, Rio Tinto, Synectics, The Renewables Infrastructure Group

23 February: Anglo American, BAE Systems, Drax, Driver Group, Greencoat UK Wind, Hellenic Telecom Industries, Hikma Pharmaceuticals, Howden Joinery, Morgan Sindall, Serco, Spectris

HALF-YEAR RESULTS

20 February: Tristel, Wilmington

21 February: Blancco Technology, Finsbury Food, Springfield Properties

22 February: Avingtrans, Transense Technologies

23 February: Genus, Hays, Made Tech

TRADING UPDATES

21 February: Safestore

US UPDATES OVER THE NEXT 7 DAYS

QUARTERLY RESULTS

17 February: Deere & Company, Daimler, CenterPoint Energy

20 February: Nordson

21 February: Home Depot, Molson Coors Brewing, Palo Alto Networks, Walmart

22 February: NVIDIA, Ebay, Etsy, Bath & Body Works

23 February: American Tower, Cheniere Energy Partners, EOG Resources, Keurig Dr Pepper, MercadoLibre, Moderna, NetEase, Warner Bros Discovery



Please reach out to your PS & Partners Advisor or myself nick.preston@partners-ps.com +6309177750730

Important information This publication is intended to be PS & Partnes own commentary on markets. It is not investment research and should not be construed as an offer or solicitation to buy, sell or trade in any of the investments, sectors or asset classes mentioned. The value of any investment and the income arising from it is not guaranteed and can fall as well as rise, so that you may not get back the amount you originally invested. Past performance is not a reliable indicator of future results. Movements in exchange rates can have an adverse effect on the value, price or income of any non-sterling denominated investment. Nothing in this document constitutes advice to undertake a transaction, and if you require professional advice you should contact your PS & PArtners financial adviser.

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