31 January 2023
A year of stability?
Earlier this month marked Chinese New Year, as we bid farewell to the tiger and embrace the Year of the Rabbit – thought to signify stability and contemplation.
This would be an appealing change of pace after last year’s volatility, and investors will undoubtedly be hoping this cosmological sentiment rings true – rather than emulating the rabbit in the ‘Great Race’ legend. Here, the fabled bunny quickly bounced ahead, but soon tired and stopped for a nap…and was ultimately overtaken.
Global markets have indeed started the year with a spring in their step – registering their third weekly gain in four. That said, trading conditions were quiet, with many Asian markets closed for the Lunar New Year celebrations and investors elsewhere awaiting the outcome of central bank meetings on both sides on the Atlantic in the week to come.
Will the Year of the Rabbit bring stability and a steady path to success? Time will tell…
The clouds gather over tech stocks
It was a mixed week in the tech realm, with Microsoft ringing in the start of the tech earnings season with better-than-expected fourth-quarter results. However, it’s important to remember the bellwether recently laid off nearly 5% of its workforce (10,000 jobs) and has seen demand for its cloud services noticeably dip as customers grew more wary in the face of the economic slowdown.
Add to that the downbeat outlook for the current quarter and all eyes will be on other tech heavyweights this week – Meta, Alphabet, Amazon and Apple are scheduled to release their results.
It’s been a bumpy road for tech stocks over the past few years – they drove the bull market in growth stocks during the pandemic, but the turnaround in fortunes saw the tech-heavy Nasdaq index suffer its worst year since 2008 and its first four-quarter fall since the dot-com crash.
Cautious optimism in the S&P 500
The 2023 picture for the wider S&P 500 is also still unclear, with two-thirds of companies reporting fourth-quarter earnings so far posting better-than-expected results, while warning of a tough year ahead. Data showed that US business activity contracted for a seventh straight month. However, figures showed that contraction in the manufacturing and services sector was shallower than expected in the first few weeks of the year.
Is the renewed optimism about the economy (that’s buoyed equities in recent weeks) grounded in reality? Investors will be guided by results for the final quarter of 2022, both in the US and Europe.
(Some of) the results are in…
The former is already seeing results – and it’s largely positive news. Last week, the US announced that economic growth held up better than expected in the fourth quarter of 2022, growing at an annual rate of 2.9%.
Despite more major redundancies following hot on the heels of Microsoft and other tech giants last week, global stock markets rallied on hopes that a resilient US economy and slowing inflation would enable the Federal Reserve to engineer the desired soft landing. The MSCI World Index hit a five-month high.
The eurozone hops out of recession territory…
Industry experts have been keeping a close eye on a survey by Consensus Economics, which recently forecast that the eurozone will avoid recession this year, boosted by lower energy prices, bumper government support and the earlier than anticipated reopening of China’s economy.
Just last month, the same survey predicted the bloc would plunge into recession – showing the sharp shift in global economic sentiment.
…while the UK suffers a blow
Another turnaround in predictions didn’t favour UK Chancellor Jeremy Hunt, however. Ahead of his March Budget, the Office for Budget Responsibility (OBR) warned that it had overestimated prospects for medium-term growth in the economy and intends to revise down its forecasts. The downgrade would obliterate the government’s £9.2 billion wiggle room from the Autumn Statement. This may require the Chancellor to make more savings in March to keep within his fiscal rules to reduce debt.
Official figures showed that government borrowing surged to record levels last month, driven by support for energy bills and the impact of higher inflation on the government’s debt repayments. In a speech outlining plans to grow the UK economy, Hunt warned that tax cuts in the Budget were unlikely.
Ahead of this Thursday’s Bank of England rate-setting meeting, markets are anticipating a hike of 50 basis points, taking the base rate to 4%. However, Mark Dowding of BlueBay is cautious. He says:
“Although this would certainly be justified by inflation and wage data, we are concerned at spreading signs of economic weakness. Meanwhile, house prices are looking very vulnerable and we think that it will be very difficult for UK rates to exceed a 4% ceiling without the risk of crashing the UK housing market and the UK economy along with it.”