Michael Hewson MSTA CFTe
CMC Markets
- EU flash CPI (Apr) – 29/04 – despite an inflation rate that is already at a record high of 7.4%, the recent ECB meeting saw a slightly more dovish tilt from President Lagarde and the governing council. This came across as a bit of a surprise to a lot of people given the hawkish tilt seen in the March meeting. This stance has already started to shift, even as core prices remain over half of where headline CPI is at 2.9%. We’ve seen a raft of ECB policymakers become more vocal about a rate rise as soon as July, with Belgian ECB council member Pierre Wunsch and ECB vice President Luis de Guindos saying a July move is becoming more likely. These calls are likely to get louder if we are to take clues from the likes of UK and US core CPI, which initially lagged behind the headline rate, and now appear to be accelerating. The ECB appears to be underestimating this effect, although there is slightly more slack in the eurozone labour market, which means wage growth will lag more. Another hot number here, with a move to 7.6% will ramp up the pressure for a July rate hike even further.
- France election – 24/04 – it’s an important weekend for French politics as incumbent President Emmanuel Macron and Marine le Pen go head-to-head in the second round of the French Presidential election. Macron is still the favourite to prevail when push comes to shove, however for most voters the choice is about as appetising as a mouldy piece of bread, a global trend that appears to have affected politics worldwide. In 2017, Macron prevailed with over 60% of the vote, however on this occasion Le Pen appears to have closed the gap, mainly down to the fact that Macron has shown himself deaf to the concerns of the poorest members of French society. Much will depend on whether the anti-Macron vote coalesces into a shift of support for Le Pen, or whether French voters simply refuse to vote for either. This is likely to be the biggest risk for Macron, that voters don’t turn out and Le Pen squeaks through that way.
- Bank of Japan rate decision (Apr) – 28/04 – the decline in the Japanese yen is likely to increase pressure on the Bank of Japan to be slightly more hawkish when it meets later this week. Since the end of last year, the Japanese yen has lost over 10% against the US dollar, which for a country is a net importer of commodities and energy in particular will exert huge upward pressure on inflation. The Bank of Japan has spent years trying to ignite the inflation genie out of its bottle with very little success. In March, headline CPI increased from 0.9% in February to 1.2%, however it is still below the levels of 1.5% seen in February 2018. With an inflation target of 2% the BOJ has only managed to briefly breach and/or hit that target in 2008, and for a few months in 2014 and 2015, when CPI peaked at 3.7% before dropping sharply. We could see a similar pattern play out here if commodity prices continue to surge and the yen continues to plunge.
- Germany/France/Italy and Spain Q1 GDP – 29/04 – the recent surge in energy prices, and commodity prices more broadly is expected to have a chilling effect on economic output in Q1, and that’s before we factor in the conflict in Ukraine. The German Bundesbank has already indicated that the German economy is set for recession due to the huge surge in energy prices, and if Russian oil and gas gets embargoed that effect is likely to be multiplied. The German economy was already in contraction at the end of last year, with this week’s preliminary Q1 GDP expected to come in at 0.2%, though we could conceivably see a negative number. The French economy is expected to slow from 0.7% in Q4 last year to 0.3%. The Italian economy is expected to slow sharply from 0.6% to 0.1% in Q1, and the Spain economy is expected to slow to 0.5%, down from 2.2% in Q4.
- US Core PCE (Mar) – 29/04 – recent comments from St. Louis Fed President James Bullard suggest that while it’s not his base case he might look at considering a 75bps rate hike when the Federal Reserve meets next month. Markets are already pricing in the probability that we’ll see a 50bps move in the Fed funds rate, and appear to be relatively comfortable with that idea now. There has been little, if any indication that headline inflation is slowing given the recent CPI and PPI numbers which we saw in March. Given that the Core deflator is the Fed’s preferred measure of targeting inflation it therefore makes little sense that estimates for the March core deflator are for a modest slowing from 5.4% in February to 5.3%, although the recent strength in the US dollar may have a modest deflationary drag. PCE deflator is expected to come in at %, down/up from 6.4%
- Sainsbury FY 22 – 28/04 – when Sainsbury reported back in Q3 CEO Simon Roberts painted an upbeat picture for the UK’s number two supermarket, as he upgraded full year guidance for underlying pre-tax profit to £720m, from £660m. On a two-year basis grocery sales were up by 6.6%, although the business continues to struggle on the general merchandise front, which includes the Argos business. Total retail sales were up by 1.4% from 2019 levels and down 5.3% year on year. Since those numbers were released, the picture has changed somewhat with the shares down at one-year lows in the wake of concerns about rising prices, impacting margins, along with rising costs as the food and retail sector competes to retain and take on staff. Earlier this month the supermarket signed up to the Real Living Wage, a pledge to pay all of its workers over £10 per hour. In recent Kantar surveys Sainsburys has struggled to compete with the likes of Tesco as well as Waitrose, while at the same time finding itself squeezed at the bottom end by Aldi and Lidl. Sainsburys appears to be stuck in that difficult space of the squeezed middle.
- Associated British Foods H1 22 – 26/04 – earlier this month Primark owner Associated British Foods share price hit its lowest levels since March 2020, in the wake of first UK lockdowns, when the company was told to close all of its store real estate. With no online operation this exposed the business to a complete stop for its Primark business where revenue was concerned, aside from any government support, including employee furlough programs. In January, when the company reported its Q1 numbers the share price was at a five-month high but has struggled since then. The European business has been its weakest performing area due to store closures in Austria and the Netherlands, where the company saw a £30m sales loss at the end of Q1. The US business on the other hand showed the biggest improvement. with overall sales up 37% from pre-pandemic levels. Total Primark sales were still 5% lower than pre-Covid. All the other businesses improved on their revenue performance from a year ago, with the exception of Grocery, which saw revenues of £1.2b, down from £1.22bn. Sugar saw a 12% rise in revenues, agriculture a 7% increase, and ingredients, up 6%. The retailer has had to deal with rising costs, and some of these are being offset by price increases where necessary, while expectations for H1 are for sales and adjusted operating profit for the group to be strongly ahead of last year. H1 Primark sales are forecast to be well over 60% ahead of last year with an operating profit margin of 11%, with all store remaining open, except for short periods in Austria and the Netherlands. Grocery revenue is expected to be 2% ahead of last year, along with sugar revenue which is expected to be 20% higher. Due to higher inflation and input costs margins could well be lower even with some price increases. The full year outlook is expected to remain unchanged.
- HSBC Q1 22- 26/04 – when HSBC reported its full year numbers the shares embarked on a decline that saw them hit their lowest levels this year in March. Since then, we’ve seen a modest rebound. The bank reported profits before tax of $18.9bn, a decent increase from last year, with the UK based banking unit outperforming with annual profits of $4.8bn, adding another $1.2bn in Q4. The bank’s Asia operations were the main area of profitability with $12.2bn, with the bank announcing a $1bn share buyback as well as an $0.18c a share dividend. The performance in the final quarter was disappointing when compared to the previous quarter, with reported profits after tax coming in at $2bn, less than half of what they were in Q3. The main reason for this was a $500m charge in respect of recent developments in China’s real estate sector. This is unlikely to have improved, and was a main concern for management, which cited a weaker outlook for growth in Q1. With the Chinese government implementing rolling lockdowns as it continues its zero Covid policy profits in Asia could well take a hit, while the wider cost of living crisis could well impact its UK business which has performed very well in recent quarters. Management guidance around Q2, as well as the rest of the year is likely to be a key factor here when determining the next move in the share price.
- Lloyds Q1 22 – 27/04 – the performance of the Lloyds Bank share price since the pandemic first broke across the shores of the UK economy has been one of life’s big mysteries, given it is still well below the levels seen pre-pandemic, and yet is in a much stronger position financially. When the bank reported its numbers back in February full year profits came in at £6.9bn, below expectations of £7.2bn. This shortfall appears to have been down to a surprise increase in operating costs which rose above £2bn in Q4, up from £1.87bn in Q3, with the shares falling soon after to one-year lows, though a lot of this decline can be put down to concerns over Russia’s invasion of Ukraine, and we have rebounded since then. In a boost for shareholders the bank announced a final dividend of 1.33p per share, bringing the total dividend for 2021 to 2p per share, as well as announcing a share buyback worth £2bn, or 2.82p per share. As far as the business is concerned loans and advances to customers rose £8.4bn on the year to £448.6bn, however on a quarterly basis this was a decline from Q3 levels of £451bn, with customer deposits also rising to £476.3bn, a rise of £25.6bn, but also lower from Q3. Net interest margins over the year improved to 2.54% on average, rising to 2.57% in Q4, with an expectation that this will improve to above 2.6% in 2022, although the economic outlook for the UK economy is likely to present the bank with significant challenges over the next 12 months.
- Barclays Q1 22 – 28/04 – it’s been a difficult quarter for Barclays, with the shares down near one-year lows, having hit their highest levels since April 2018 at the start of this year. The honeymoon for new CEO Venkat is well and truly over after his competence was called into question after it was revealed that the bank was facing a £450m hit and regulatory investigation over some of its trading products in the US, when he was in charge of controlling the banks risk environment. The mistake appears to have come about after it was realised that the bank sold nearly £28bn of exchange traded notes that track commodity prices over a three-year period and only registered £16bn of them with the SEC. It now has to repurchase the balance at a cost of £450m which is likely to clobber this week’s Q1 numbers. It had been looking very positive up until then with its full year numbers hitting a record £8.4bn, up from last year’s £3.1bn. Total revenues came in at £21.9bn, a modest increase on last year, however operating costs rose to £14.4bn. The investment bank was somewhat of a mixed bag in terms of annual revenues. The equities business saw a 20% rise in income, rising to just shy of £3bn, however FICC (fixed income) fell by 33% to £3.45bn. Investment banking helped to offset this underperformance, with a big jump in advisory fees and other capital markets activity, which pushed up income by 34% to £3.66bn. The UK bank also saw a decent performance, profits here rising to £2.47bn, helped by an increase in total income which was driven by higher mortgage demand, although a modest decline in net interest margin took some of the edge off. Income from credit card balances fell as consumers cut back on credit card spending and reduced their balances. Total loans to customers rose to £208.8bn, with most of that driven by the sale of mortgages. At the time the bank said it planned to buy back $1bn of its shares, however this could well be delayed in light of the recent scandal, while investors will also be looking for assurances that this won’t happen again. In the wider scheme of things investors will also be looking to see whether Barclays goes down the route of JPMorgan and Goldman Sachs in setting aside higher credit loss provisions as a result of higher interest rate risk.
- NatWest Group Q1 22 – 29/04 – like its peers NatWest Group shares underwent a sharp slide in it share price to a one year low, with the Russian invasion of Ukraine partly contributing to some of that weakness. We’ve managed a modest rebound since then but it is clear that for the UK economy especially the next 9 months are likely to be challenging ones in the face of surging energy prices and the squeeze on wages that is coming our way starting in April. Last year the bank saw total profits for the year come in at £2.95bn, compared to a loss of £753m a year ago. The numbers were flattered enormously by the adding back of £1.28bn in loan losses reserves from 2020, nonetheless there was plenty to cheer from shareholders, of which the UK government is the main one, although since those numbers were released the government stake has fallen to 48.1% after the sale of £1.2bn worth of shares at the end of March. CEO Alison Rose said the bank expects to maintain ordinary dividends of around 40% of attributable profit, and to distribute a minimum of £1bn in each of 2022 and 2023, via a combination of ordinary and special dividends. Net lending over Q4 improved by £800m, while over the course of 2021 customer deposits increased by £48.1bn to £479.8bn. While the outlook is expected to be challenging over the next 9 months, the main focus is expected to be on lending patterns to not only consumers, but business more broadly. Cashflow should not be problem given that the bank will receive the €6.4bn proceeds of the deal to sell its Irish loan books to Permanent TSB, which will reduce the value of its assets and will go to help boost its capital position further.
- Microsoft Q3 22 – 26/04 – it’s been a difficult quarter for tech stocks, some more than others, as concerns about valuations, as well as rate rises cause investors to be more discerning about the areas, they put their money. Since the record highs of late last year Microsoft shares have slipped back, although they have managed to hold above $270. Its Q2 numbers were very strong with revenues coming in at a record $51.73bn, a 20% increase from a year ago, and above expectations, while profits rose to $2.48c a share. Its cloud business Azure saw an increase in revenues of 46%, in line with expectations, although down from the previous four quarters, which saw revenue growth above 50%. Its “Intelligent Cloud” business also saw another decent quarter, reporting record revenue of $18.33bn. Personal computing and gaming revenue saw revenue come in at $17.47bn, a big jump on Q1, and above the same quarter last year, although this was largely expected with the increased adoption of Windows 11. Xbox content and services revenue rose by 10%, reinforcing the decision to go all in with the announcement to buy Activision Blizzard. If the acquisition is approved then this segment is expected to be a key growth area going forward and could well go on to become its biggest earner, assuming it passes regulatory scrutiny. On guidance Microsoft said they expected Q3 revenue to slow slightly to between $48.5bn and $49.3bn, above forecasts. Profits are expected to come in at $2.19c a share.
- Apple Q2 22 – 28/04 – the Apple share price has held up well despite all the volatility of the last few weeks. In Q1 revenue came in at a new record of $123.95bn, well above expectations of $119bn, while profits came in at $2.10c a share, or just under $35bn, with record revenue for iPhone sales. The numbers were made up as follows, iPhone revenue came in at $71.63bn, above forecasts of $67.74bn, Mac revenue, $10.85bn, Wearables, Home and Accessories, $14.7bn, iPad revenue $7.25bn, Services revenue of $19.25bn, with only iPad revenue falling shy of consensus expectations, of $8.1bn, which was a little disappointing given the launch and updates of the mini and iPad range. Apple CFO Luca Maestri blamed the iPad miss on difficulties in sourcing enough components, as well as allocating components away to the more expensive iPhone, which suggests that demand wasn’t the problem here, and that Apple put its priority on its higher margin products like the iPhone. Operating margins on products came in at 38.4%, although services margins rose to a new record of 72.4%. Services revenue continues to go from strength to strength and with 785m subscribers to music streaming and gaming, Apple CEO Tim Cook suggested that they starting to look at developing products for augmented reality, and were developing plans for an AR headset and glasses in the next year or so, as it looks to move into the Metaverse. The Q1 numbers were all the more impressive given that there were some product delays during December, with all geographies, with the exception of Japan which fell short. These disruptions could well bleed through into Q2, however this isn’t expected to adversely impact its ability to shift its products, with strong demand still coming through, although Q2 revenues are still expected to slow to around $90bn, with Apple once again refusing to offer guidance in line with previous quarters since the pandemic began. Its China business is also likely to have been affected by the various lockdown disruptions. Profits are expected to come in at $1.42c a share.
- Amazon Q1 22 – 29/04 – the Amazon share price has also seen an indifferent quarter despite reporting fairly weak Q1 guidance when it reported its Q4 and full year numbers at the beginning of February. Net sales are expected to come in between $112bn and $117bn, below market expectations of $120bn, while operating income is set to come in between $3bn and $6bn compared to $9bn a year ago. Some of the disappointment was offset by the announcement of a $20 a year, or $2 a month price hike in Amazon Prime on its US members, as investors fretted about the company maintaining its margins in the face of higher costs. In Q4 Amazon hired an extra 140k extra staff, while over the year operating expenses have risen from $363bn in 2020, to $445bn. The big concern over a price hike like this is that they might experience some churn, however it appears that management are betting that a new Lord of the Rings series, and streaming rights to Thursday night football could tip the balance in their favour. Its cloud business has also been a significant contributor, in Q4 the cloud business AWS posted revenue of $17.8bn, a 40% increase on last year, as well as beating the $16.1bn in Q3, which was a continuation of quarter-on-quarter improvements seen throughout the whole of last year. Investors will be hoping this trend of growth continues, as we look ahead to the upcoming 20:1 stock split, which was announced in March, and is set to take place on June 6th subject to shareholder approval. Profits are expected to come in at $8.51c a share.
- Alphabet Q1 22 – 26/04 - when Alphabet reported its last set of number in Q4 the share price briefly surged to new record highs, above $30, after recording record revenues for the quarter, before sliding back towards its lowest levels this year. Any concerns that investors might have had, that rising costs might impact the profitability of its Google business were comprehensively put to bed as the company reported record revenues of $75.33bn for Q4, a 32% increase on the same quarter a year ago, while also improving operating margins to 29%. The advertising business was once again the standout performer, accounting for $61.24bn of total revenues, with YouTube accounting for $8.6bn of that amount and generating almost $26bn in operating income. This was reduced by losses in its cloud and other bets businesses, although losses in the cloud business narrowed to $890m on revenues of $5.5bn. Other bets posted losses of $1.45bn. The company also announced a 20:1 stock split in an attempt to help broaden the shareholder base, which will take effect on July 15th subject to shareholder approval. The company’s success has attracted scrutiny particularly in the area of digital advertising with the business facing anti-trust lawsuits across a number of US states in the past few months. Profits are expected to come in at $25.82c, with the big question being whether Alphabet can sustain the type of revenue growth of 30% and above we last year, at a time when costs have risen substantially. Last year the employee headcount rose by over 21k to 156,500.
- Meta Platforms – Q1 22 – 27/04 – when Facebook owner Meta reported its Q4 numbers reported back in February, the shares plunged in one of the biggest one day falls in market cap terms since the 1980’s. The Q4 numbers themselves weren’t that bad, with revenues coming in $33.67bn, which were better than expected, while profits came in slightly short at $3.67c. The negative reaction came from the daily and monthly active user numbers, which came in below expectations, raising concerns that social media was hitting peak user growth. Facebook also warned that Q1 revenues for Q1 would come in between $27bn to $29bn, a significant decline from the current quarter, and which was below market expectations of $30bn. The fallout from Apple privacy changes appears to be hitting its ability to generate revenues, as well as the slightly weaker economic outlook, prompting a slowdown in ad spend. Snap last week missed on both revenues and profits, as well as warning on Q2 as ad spend fell back sharply. Could we see another Meta meltdown this week, after Netflix was punished last week for missing on its numbers?
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