What went wrong?

What went wrong?

No red wave, ECB fears, a “meta” mistake and crypto exchange collapse

  • Republicans fail to sweep elections
  • Risks of a European wage spiral?
  • The end of the “metaverse”? 
  • Crypto in chaos
  • Key data for the coming week
  • Key corporate earnings for the coming week

US:

S&P 500  6.76% QTD and 19.68% YTD

Nasdaq 100  5.32% QTD and 33.83% YTD

Dow Jones Industrial Average  15.44% QTD and 8.74% YTD

NYSE 8.28% QTD and  15.01% YTD 

Europe:

Stoxx 600 8.38% QTD and 13.83% YTD

DAX   12.81% QTD and 13.87% YTD 

CAC 40  11.60% QTD and 10.10% YTD 

IBEX35  9.14% QTD and 7.73% YTD 

FTSE MIB  15.16% QTD and 13.04% YTD

FTSE 100  5.84% QTD and 1.20% YTD

Global:

MSCI World Index  5.21% QTD and 22.87% YTD

Bitcoin  22.25% MTD and 65.72% YTD

Ethereum  28.81% MTD and 69.73% YTD

Note: As of 6pm EST 9 November 2022

Did pollsters get it wrong? Prior to yesterday’s midterm elections, the Democrats controlled the Senate, which was split 50:50 with Vice President Kamala Harris, as President of the Senate, able to cast any deciding votes. In the House of Representatives, the Democrats were holding  220 seats to the Republicans 212 with 3 seats empty; these seats were previously held by two Democrats and one Republican, which would bring the Democrats to 222 and the Republicans to 213. Although it looks increasingly likely that the Republicans will win the House of Representatives as they have at least 210 seats thus far (they need 218) it was not the “red wave” suggested by pre-election polls. A push by the Democrats to protect abortion rights following the Surpreme Court’s reversal of Roe v Wade, along with the Republicans’ move even further towards the right with the nomination of a group of conspiracy theorists and election deniers backed by former President Donald Trump, helped stopped the red wave from crashing down. Even long time South Carolina Republican senator and bastion of the right, Lindsey Graham, acknowledged on Tuesday that this was “definitely not a Republican wave, that is for darn sure.”  

It is still not clear which party will actually control the Senate. The Democrats won some surprising victories including the key state of Pennsylvania, where Democrat John Fetterman beat Republican candidate and celebrity TV doctor, Mehmet Oz for a Senate seat. However, other key Senate seats are still too close to call, including Arizona where Republican nominee Blake Masters is facing Democratic nominee Mark Kelly and Nevada, where Republican Senate nominee Adam Laxalt is facing Democrat Catherine Cortez Masto. Both Masters and Laxalt are leading “election deniers”. According to CNN, Laxalt, the state's former attorney general, was a co-chairman of Trump’s 2020 presidential campaign in the state and filed lawsuits attempting to overturn Nevada’s results in that election, which he said was “rigged” while Masters released a campaign video as he was competing for the GOP nomination in which he said he believed Trump had won the 2020 election. Both candidates were endorsed by former President Trump.

There may not be final clarity about who controls the Senate until the December run-off election in Georgia between Democrat candidate Raphael Warnock and Republican candidate and former NFL player, Herschel Walker. 

The midterms also highlighted who may be on the political landscape in the 2024 Presidential election. Ron DeSantis won the governorship in Florida, beating his Democratic rival Charlie Crist with a 19 point lead, the widest in Florida's gubernatorial race in 20 years. He is now seen as the new face of the Republican party and a rival to his one-time supporter, former President Donald Trump. 

Inflation and the state of the economy were, according to exit polls, voters' primary concerns. CPI data released today shows a rise of 7.7%; although this is a reduction, it is still stubbornly high despite the Fed’s series of rate hikes. This will also put further pressure on President Biden as he seeks to advance his economic agenda. If the Republicans win the House by a slim majority that will be enough for them to influence the rest of President Biden’s term including blocking challenges to state abortion laws and pressing investigations into Biden’s family’s activities.

The USD continues to maintain its strength despite some speculation that the slowing economy will lead the Fed to slow down the pace of rate rises: it’s up almost 16% YTD against the GBP, almost 12% YTD against the EUR, and is over 27% against the YEN.

This week saw investors turning to the fundamentals with basic materials such as Newmont Corporation, Lyondellbasell Industries, Albemarle, Freeport-McMoRan Inc. and Mosaic Company all .

Energy stocks such as Marathon Oil Corporation, SchlumbergerExxon Mobil, Chevron Corporation, Occidental Petroleum, Devon Energy Corporation, APA Corp (US), Baker Hughes, and Halliburton started the week well but later fell as oil extended its losses due to renewed COVID curbs in China raising concern about fuel demand in the world's biggest crude importer.

Tech and growth stocks had a mixed week this week: Microsoft , Alphabet , Meta Platforms , Amazon , and Tesla .

Has the ECB gotten it wrong? It seems that one of the ECB’s worst fears may be coming to pass. The ECB stated earlier this year that there were no significant signs of wage growth as it had been “contained or modest” in 2022 due to agreements concluded in 2021 or earlier and since employees were given temporary payments to help them deal with the higher cost of living. Just last week, ECB board member Fabio Panetta, said that wage pressures were so far contained.

The ECB does expect average wage growth to slowly rise from 4% in 2022 to 4.8% in 2023 due to tight labour markets. “Wage pressures continued to build and were increasingly becoming an additional cost concern for many firms,” the ECB said, after talking to 69 leading non-financial companies between 26 September and 6 October. However, this suggestion that rate rises were contained may be wrong. According to a wage tracker from the Central Bank of Ireland and job site Indeed, pay growth is accelerating above the levels suggested by the ECB. The tracker, based on millions of job postings on the Indeed site, uses real-time data from online job postings. It shows that the median wage cited in adverts was 5.2% higher at the end of October than a year earlier. October wage growth was highest in Germany at 7.1%, followed by France at 5%, Ireland at 4.7%, Italy at 4.2%, the Netherlands at 4.0% and Spain at 3.5%. Although wage growth in the Eurozone has been running less than in the US or UK, rising wages should concern the ECB as Eurozone inflation hit a record 10.7% in October. The ECB had attributed most inflation to the surge in energy prices, food prices and supply constraints. It may have to readjust its thinking and policy to accommodate the growing influence of demand on inflation.

Zuckerberg’s meta mistake. Facebook-parent Meta, cut 11,000 jobs this week, more than one in eight staff, after a disastrous collapse in revenue. Owner Mark Zuckerberg said on Wednesday he “got it wrong”. Meta’s stock fell 71% this year due to disappointing earnings and falls in revenue due to a sharp slowdown in the digital advertising market. In a statement, Zuckerberg said that he took responsibility for the mass terminations and that he’d anticipated the surge in web traffic from the beginning of the Covid-19 lockdowns would be part of a permanent acceleration. However, this failed to happen. 

Were investors wrong to believe in FTX? The deal agreed by the founder and CEO of Binance, Changpeng ‘CZ’ Zhao to buy Sam Bankman-Fried’s FTX currency exchange has fallen apart. Binance claims that concerns about FTX’s business practices and an investigation by US regulatory authorities forced it to reconsider its position. In a statement on Wednesday, Zhao said, “Our hope was to be able to support FTX’s customers to provide liquidity, but the issues are beyond our control or ability to help,” Sam Bankman-Fried, the founder of FTX, reportedly told FTX investors on Wednesday that without a cash injection, the company would need to file for bankruptcy as it faced a shortfall of up to $8 billion and needed $4 billion to remain solvent. FTX is attempting to raise rescue financing in the form of debt, equity, or a combination of the two. On Tuesday, Bankman-Fried told staff, "I’m sorry.” 

US regulators are rumoured to be investigating whether the firm properly handled customer funds and its relationship with his trading house, Alameda Research. The quick collapse of FTX has shaken the crypto market as Bankman-Fried had previously been seen as a saviour for the crypto world after stepping in to save other crypto firms as the crypto market collapsed amid rising interest rates. Bankman-Fried’s downfall has led investors to doubt which institutions are safe in this still largely unregulated market. However, according to Bloomberg news, Robinhood Markets Inc. has seen its biggest crypto inflows ever in the last two days and Binance and Coinbase Global Inc. have also seen large inflows, according to data from CryptoQuant.

The impact collapsing exchanges has had on the crypto market this year has been significant. Reuters estimates that the cryptocurrency market has fallen by about two-thirds from its peak to $1.07 trillion. 

Key data to look out for this coming week 

Europe

Friday: EU Ecofin meeting, German Harmonised Index of Consumer Price data (inflation data), EC’s Economic Growth Forecast released, speeches by ECB Vice president Luis De Guindos, ECB executive board member Fabio Panetta, and ECB chief economist Philip Lane. 

Tuesday: Eurozone employment change, Eurozone GDP, Eurozone ZEW Economic Sentiment Survey, German ZEW Current Situation and Economic Sentiment surveys.

Wednesday: ECB Eurozone Financial Stability Review.

Thursday: Eurozone Core Harmonised Index of Consumer Prices, Eurozone Harmonised Index of Consumer Prices. 

UK: 

Friday: GDP, Industrial production, Manufacturing production, and Total Business Investment data. 

Monday: Bank of England Monetary Policy Report hearings to the Treasury Select Committee. 

Tuesday: Average earnings, claimant count rate and claimant count change, ILO unemployment rate. 

Wednesday: CPI, PPI and RPI data, Core Consumer Price Index and PPI Core output data. 

In the US: 

Friday: Michigan Consumer Sentiment Index and University of Michigan 5 year inflation expectations survey

Monday: US bond markets closed for Veterans day. 

Tuesday: Producer Price Index.

Wednesday: Retail Sale data.

Thursday: Building permits, Housing starts, Initial jobless claims, Continuing jobless claims, and the Philadelphia Fed Manufacturing Survey.

Upcoming Corporate Earning Reports:

Friday: Softbank Corp., Naturgy Energy Group, Cellnex Telecom, Toshiba Corporation, Hydro One, Algonquin Power & Utilities, Samsonite International 

Monday: Mitsubishi UFJ Financial Group, Recruit Holdings, J&J Snack Foods, Vitesco Technologies

Tuesday: Home Depot, Walmart, Alcon, Valvoline, Land Securities Group, Krispy Kreme Inc.

Wednesday: Cisco Systems, Nvidia, Tencent Holdings, Lowe's Companies, TJX Cos. Inc., Experian PLC, British Land Company

Thursday: Alibaba Group Holdings, JD.com, Applied Materials, Palo Alto Networks, Siemens AG, Ross Stores, Gap Inc., Williams-Sonoma, Kohl's Corporation

DISCLAIMER: While every effort has been made to verify the accuracy of this information, EXT Ltd. (hereafter known as “EXANTE”) cannot accept any responsibility or liability for reliance by any person on this publication or any of the information, opinions, or conclusions contained in this publication. The findings and views expressed in this publication do not necessarily reflect the views of EXANTE. Any action taken upon the information contained in this publication is strictly at your own risk. EXANTE will not be liable for any loss or damage in connection with this publication.

This article is provided to you for informational purposes only and should not be regarded as an offer or solicitation of an offer to buy or sell any investments or related services that may be referenced here.

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