Will partisan politics lead to economic collapse?

Will partisan politics lead to economic collapse?
  • Corporate reporting news
  • Debt ceiling jitters
  • Europe’s fiscal battle ahead
  • Crypto’s regulatory confusion
  • Key events in May

Markets in April

Early April saw equities slide due to the banking turmoil caused by the collapse of SVB and the Credit Suisse’s firesale. However, tech stocks came to the rescue with Apple and Microsoft accounting for nearly half of the S&P 500’s gains as large-cap tech proved a haven for investors. The question for many now is whether the US will be able to avoid a recession later this year. Consumer Confidence hit a nine-month low in April and labour markets are loosening but ever so slightly. GDP is slowing, with a 1.1% annualised rate last quarter. The economy grew at a 2.6% pace in the fourth quarter. The Federal Reserve’s preferred inflation gauge, the core PCE deflator, is due Friday. Although the Fed is expected to raise interest rates by 25 basis points next week, the potential for a tightening of credit conditions linked to the banking turmoil caused by the possible collapse of First Republic Bank may lead the Fed to adjust the pace of its interest-rate path. Markets are ending April increasingly rattled by the threat of a US debt default. The cost of insuring exposure to US sovereign debt continues to rise, with 5 year CDS values changing, according to Worldgovernmentbonds.com, +49.15% during last week, +108.34% during the last month, and +256.78% during last year.This indicates growing market concerns that the government could default on its debt.

The European stock market has so far outperformed the US in April as falling energy prices have helped to de-risk European equities. European equities remain cheaper than their US peers. Europe has also benefited from falling input prices and improving consumer sentiment despite the high probability of rising interest rates. LVMH became the first European company to have a market value above $500 billion.The development comes after the company became part of the world’s 10 biggest companies. Shares reached at an all-time high after the luxury goods giant reported strong sales lifted by a rebound in China.
 

Global Market Indices

US: 
S&P 500 -0.92% MTD and +6.05% YTD
Nasdaq 100 -3.46% MTD and +16.32% YTD
Dow Jones Industrial Average +0.77% MTD and +1.16% YTD
NYSE Composite -0.95% MTD and +0.29% YTD

Europe:
Stoxx 600 +1.17% MTD and +9.02% YTD
DAX +1.07% MTD and +13.45% YTD
CAC 40 +1.97% MTD and +15.34% YTD
FTSE 100 +2.89% MTD and +5.38% YTD
IBEX 35 +0.66% MTD and +12.94% YTD
FTSE MIB -0.02% MTD and +14.34% YTD

Global:
MSCI World Index -0.33% MTD and +6.48% YTD
Hang Seng -3.15% MTD and -0.12% YTD

Corporate reporting season: What’s next?

According to Refinitiv I/B/E/S data as of 25 April, so far Q1 2023 data has indicated that Y/Y blended earnings growth estimate is -3.9%. If the energy sector is excluded, the growth rate for the index is -5.2%. Of the 124 companies in the S&P 500 that have reported earnings as of 25 April, 79.0% reported above analyst expectations. This compares to a long-term average of 66%. The Q1 2023 Y/Y blended revenue growth estimate is 2.1%. If the energy sector is excluded, the growth rate for the index is 3.1%. According to Factset data, the (blended) net profit margin for the S&P 500 for Q1 2023 is 11.2%, which is below the previous quarter’s net profit margin, below the year-ago net profit margin, and below the 5-year average net profit margin (11.4%). If 11.2% is the actual net profit margin for the quarter, it will mark the seventh straight quarter in which the net profit margin for the index has declined quarter-over-quarter. It will also mark the lowest net profit margin reported by the index since Q4 2020 (10.9%).

The Earnings season has thus far brought some disappointment across sectors with materials having the worst Q1 2023 revenues of all sectors in the US, down almost 8%. Consumer discretionary remained strong throughout the quarter, with revenues up 7.0% of companies reporting to date. 

In Europe, the Stoxx 600 is indicating thus far that in Q1 the best performing sectors were financials, technology and consumer staples. Utilities have, according Refinitiv data, taken quite a hit in Q1 with revenues down almost 61%. 

Mega cap stocks had a mixed April thus far with Amazon and Microsoft up, and AppleMeta PlatformsAlphabetNvidia, and Tesla down.

Tesla posted its lowest quarterly gross margin in two years. The company reported at 19.3%, missing market estimates. It had slashed prices multiple times this year in an attempt to remain competitive. CEO Elon Musk said Tesla could sacrifice its industry-leading margins to drive volume growth during a recession and keep pace with rising competition in China.

Meta Platforms shares surged by more than 12% in after-hours trading on 26 April after it reported Q1 revenue that exceeded analysts’ estimates, with first quarter sales rising to $28.6 billion, a return to profit after three straight quarters of declines. The company said revenue in the current quarter will be as much as $32 billion, compared to the $29.5 billion average estimate. Alphabet shares also rose on news that its Q1 revenues were +3%, outpacing analysts’ expectations. Its search advertising business has shown resilience amid economic uncertainty and increased competition. Microsoft shares also rose after quarterly revenues rose +7% and it reported robust demand for its Azure cloud services. Both companies announced in January that they were cutting thousands of jobs to reduce their costs. However, Microsoft has now been hit by the UK’s Market and Competition Authority’s decision to block its acquisition of Activision Blizzard, maker of the hit game Call of Duty. According to Bloomberg news, Microsoft and Activision have pledged to appeal the decision, but the UK block, combined with US Federal Trade Commission’s opposition to the merger, means the transaction has slim chances. 

Energy stocks: A mixed April thus far due to concerns around Fed rate rises with Energy FuelsApa Corp (US)Marathon PetroleumBaker Hughes Company, and Occidental Petroleum Corporation all down, and BPShell, ChevronExxonMobil , and Halliburton all edging up

Materials and Mining stocks had a mixed April as copper prices fell on uncertainty over further US rate hikes, sluggish Chinese demand rebound, and a risk-off sentiment amid banking sector concerns. This hit mining stocks with Freeport-McMoranNewmont Mining, and Nucor Corporation down and Sibanye Stillwater up. Materials stocks were also hit with Albemarle CorporationYara InternationalCF Industries HoldingsMosaicCelanese Corporation, and Dow Chemical, all down.

Currencies

The dollar under pressure. Although the Fed is expected to raise rates another 25 basis points at the May meeting, the dollar has continued to fall in April due to signs of the economy slowing and expectations that other central banks will need to continue tightening for longer. The ECB, which is battling higher inflation rates than the US, will likely continue to hike beyond the May meeting. This suggests further room for upside gains in the single European currency. Sterling has benefitted from dollar weakness and expectations of further rate rises by the BoE. The dollar continued to weaken in April with the EUR +3.18% YTD against the US dollar, the GBP is +3.08% against the US dollar, and the YEN is +1.92% against the US dollar.

Bitcoin +0.92% MTD and +72.68% YTD
Ethereum +3.08% MTD and +56.52% YTD

Ethereum surged in April thanks to the Shapella upgrade on 12 April which introduced a pivotal change in Ethereum’s network, EIP- 4895. This allows stakers to effectively earn interest on their stake. According to CoinShares Digital Asset Fund Flows Weekly Report, institutional ETH investment products saw inflows of $17 million in the week following the introduction. 

Note: as of 6pm EDT 26 April 2023

Fixed Income

US Treasuries to 3.44%.
German bunds to 2.40%. 
UK Gilts to 3.72%.

Yields fell again in the latter part of April as concerns grew about the US banking system after First Republic Bank reported more than $100 billion in deposit withdrawals in the first quarter. European investors have also been bracing for at least a 25 basis point rise in the ECB May meeting with expectations of a further rate rise in June growing.
 

Global macro updates

Debt ceiling stand-off. Concerns are growing over the ability of the US government to agree on a debt ceiling plan. On 26 April, In a mostly partisan vote of 217-215, the Republican-controlled US House of Representatives managed to pass a bill that would increase the $31.4 trillion federal debt ceiling by $1.5 trillion to stave off a US payments default until March 31, 2024 at the latest. However, Senate Majority Leader Chuck Schumer has said the House bill is "dead on arrival." He said the Republican legislation "only brings us dangerously closer" to an historic US debt default. Senate democrats have repeatedly stated that they will not accept the bill as it requires trimming $4.5 trillion in spending over a decade, in part by cutting discretionary spending by $130 billion next year and capping its growth at 1%. The US Treasury has said it would run out of money to pay the bills by June although the exact “X” date remains unknown. Biden has called on congressional Republicans to raise the debt ceiling without condition and has refused to negotiate. Although debt ceiling disagreements have gone to the wire before, notably in 2011 and 2013, this time around it is happening in a much higher interest rate environment within the US and globally. If there is no increase or suspension of the ceiling, the US would default on payment obligations, something US Treasury Secretary Janet Yellen has warned would cause economic and financial “collapse.” The Treasury began taking “extraordinary measures” earlier this year to meet its financial obligations after breaching the debt ceiling. Treasury secretary Janet Yellen and Federal Reserve chair Jay Powell have called on Congress to lift the debt ceiling imminently or risk an unprecedented default that would wreak havoc on both US and global economies.

Europe’s looming fiscal fights. The EU is looking to reform the Stability and Growth Pact, the bloc’s rules to control public expenditures, however there are signs of growing disagreement. The European Commission (EC) outlined proposals on 26 April to reform the Stability and Growth Pact, but these, according to Bloomberg news, fell short of German Finance Minister Christian Lindner’s call for stricter debt-reduction targets. Germany has expressed concerns about the possibility of the EC giving too much space to highly indebted governments to balance their public accounts. Germany has requested more transparency and strict common benchmarks. During the IMF spring meeting earlier this month, European Commissioner for Trade, Valdis Dombrovskis, has said, “Clearly we are not getting back to the 1/20th rule” that forced member states to implement severe adjustments to their public debt levels.” The Centre For European Reform, a think-tank, has warned that a big fight over the rules will take place after the Commission translates its proposals into a draft regulation. It says the Commission is now under time pressure to deliver reform: even if the member-states find agreement, any regulation will need to go through the whole EU legislative process including legislative back and forth between the Council and the Parliament. Unless a deal is made in the coming weeks, the process will spill into next year, which is a concern given European parliament elections in May 2024. 

SEC’s continuing crypto woes. Coinbase Global filed a petition on 24 April to try to compel the US Securities and Exchange Commission (SEC) to create new rules for digital assets, the company said in a blog post. According to Decrypt.co, Coinbase filed a petition for rulemaking with the SEC last year in which it urged the regulator to provide clarity on the circumstances under which a digital asset is a security and create a new market structure framework that is compatible with cryptocurrencies. Coinbase was issued a Wells Notice or warning of potential US securities law violations in March. Meanwhile, the European Commission has made its regulatory intentions clearer with the passing of the Markets in Crypto-Assets (MiCA) Regulation which gives a focus on disclosure and consumer protection. It is a directly applicable regulation across the EU’s 27 Member States, along with Norway, Iceland, and Liechtenstein. The European Parliament also voted 529-29 in favour of a separate law known as the Transfer of Funds regulation, which requires crypto operators to identify their customers in a bid to halt money laundering.
 

Key events in May

3-4 May 2023 US Federal Reserve Monetary Policy meeting. The Fed held tight to its rate path in March, raising rates by 25 bps. Although the labour market is weakening which may help keep wage growth low, there are increasing indications of rising recession risk later this year. This points to a more cautious path for monetary policy. Market expectations are that the Fed will raise in May, hold for the rest of Q2 into Q3 and then cut towards the end of the year. However, core inflation, which has remained persistent high, is unlikely to come down enough to allow for much policy easing. The Fed has stressed repeatedly that once it reaches its terminal rate, it will continue to hold to ensure that the 2% target rate is sustainable.

4 May 2023 ECB meeting and monetary policy decision. The ECB is expected to raise rates again at the May meeting by at least 25 basis points. Expectations for a further rate rise in June are also rising. Several ECB policymakers have come out in support of further tightening. These include Croatian central bank Governor Boris Vujcic, who said this week that ECB had "no choice but to raise rates further" until there was a "change in trend" in underlying inflation.This sentiment for further rate rises was supported by French ECB policy maker Francois Villeroy de Galhau,who said the ECB is justified in maintaining a tight monetary policy as underlying inflation pressures remain, and Central Bank of Ireland Governor Gabriel Makhlouf, who said that pausing the ECB's tightening campaign would be a premature move.

4-5 May 2023 Shanghai Cooperation Organisation (SCO) foreign ministers’ meeting. The foreign ministers of SCO members will meet in Goa (India). Iran will attend the meeting as a member for the first time.

6 May 2023 Coronation of King Charles III, United Kingdom. The coronation marks a historic change to the UK monarchy and head of state. There is increasing pressure on the monarchy with more public calls for the removal of the King as head of state in some Commonwealth countries.

9-11 May 2023 The 42nd ASEAN Leaders’ Summit. The participants will discuss economic, political, security and sociocultural developments in Southeast Asian countries in Labuan Bajo, Indonesia. 

11 May 2023 Bank of England Monetary Policy meeting and monetary policy report. The BoE raised interest rates 11 times in a row and is highly likely to raise them again by 25 basis points in the May meeting. Headline iInflation is still running at 10.1% with core still running at 6.2%. Although the BoE’s chief economist, Huw Pill, has said Britons need to accept the fact that “we’re all worse off” due to rising prices and should stop demanding pay rises as this is driving inflation higher, another rate rise will be almost impossible to avoid. BoE governor, Andrew Bailey has cautioned against slowing down rate hikes to avoid a return to 1970s inflation and other policy makers such as Catherine Mann, has said that while gas and energy prices are falling, “core goods and services are trending up” which “is going to make it very difficult to do our job.”

11-13 May 2023 G7 Finance Ministers’ and Central Bank Governors’ Meeting. With the focus on maintaining macroeconomic and financial stability, the meeting is likely to focus on bank collapses in the US, continuing sanctions against Russia, and ensuring supply chain resilience. 

14 May 2023 Turkey General Election. The opposition bloc could credibly defeat the ruling Justice and Development Party (AKP) led by President Recep Tayyip Erdoğan. The AKP are fighting one of the toughest campaigns in their two decades in power. National polls put Erdoğan neck and neck with Kemal Kılıçdaroğlu, the 74-year-old leader of the Republican People’s party who will represent the united opposition in the presidential vote.

19-21 May 2023 G7 Leaders Summit, HIroshima, Japan. Participants will likely discuss Ukraine and the G7’s official position towards Russia. The group also will be addressing the threat of climate change and the need to provide developing countries with additional financial aid to cope with the loss and damage caused by global warming.

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