All change: ECB’s hawkish pivot, Facebook’s demise and assessing the chance of $100 oil

It was a historic day for financial markets on Thursday, with US stocks recording their worst day for a year. The S&P 500 fell 2.44%, the most since February 2021, sovereign bond markets across the world, but particularly in the UK and Europe, dived as central banks were also in focus. A surprise hawkish shift from the ECB has the market considering the possibility of rate hikes this year, and the euro is higher across the board. Some big earnings misses, central bank pivots and the prospect of a weak payrolls report in the US has sent markets back into a tailspin. It looks like weaker risk sentiment is not just a phenomenon for January. 

Meta can’t save Facebook 

Earnings season for Q4 2021 will be remembered for Facebook’s epic share price decline. Over $220bn was wiped off the Meta Platform’s (Facebook’s parent company) share price on Thursday after the stock sank by more than 26% after it reported a dismal outlook for revenues. This dragged the Nasdaq lower; it fell more than 3.7% and is poised to open another 2.2% lower on Friday, according to the latest futures prices. There was a small attempt at buying Meta’s shares at the US market close on Thursday, the stock price rose from a low of $235 to $241, but this seems like a fairly tepid “recovery” before the close and there could be further selling to come, especially if the steep sell off on Thursday does not lead to a sustained recovery rally as we end the week. After a stunning performance for the tech sector in 2021, the market has been hovering with its finger on the sell button in recent months as signs grow that the pandemic is finally behind us, interest rates are set to rise in the US and around the world and value stocks become more attractive. 

Facebook’s long-term problem could lead to long-term decline 

The market is punishing stocks that disappoint this earnings season. Facebook said that Q1 2022 revenues would be in the range of $27bn- $29bn, which is between 3% and 11% YoY growth, below the $30.3bn that markets were expecting. This would be the slowest growth period in Facebook’s history. However, there are more fundamental concerns for investors, and it’s not just one weak quarter of growth that’s denting Meta’s share price. Facebook said that there is increasing competition including from TikTok, and there is a fear that Facebook is no longer attractive to the key 18–24-year-old age cohort. Added to this, there is now a clear divergence in Facebook and Google’s future growth paths and share prices, for many years the Google and Facebook share prices tracked each other closely. Google and Facebook are the two dominant online advertising companies; however, it looks like Google is pulling ahead of its rival, and it can thank Apple. The problem for Facebook is that its apps rely on Apple and Google for distribution. Apple’s changes to its privacy policy last year is hitting Facebook harder than Google, because Google owns Android, its own operating system. Facebook has nothing like this; thus, Apple’s App Tracking Transparency feature is expected to cost Facebook $10bn in revenue this year. Added to this, Facebook’s core business is losing users and the popularity of its video feature on Instagram is also hurting ad revenues as the price of advertising on video tends to be cheaper. Thursday’s share price plunge was a horror show for Facebook, but perhaps it was a necessary re-evaluation of the company’s value. It’s  risky to run a social media platform that lives off advertising revenue when you don’t own your own operating system, and this could mean that there will not be a recovery rally waiting in the wings for Meta. 

A tale of two tech companies …

It wasn’t all bad news for tech. Snapchat, the instant messaging app, posted its first profit as it managed to adjust to Apple’s privacy push. It reported a $22.6mn net profit after sales rose by 42% to $1.3bn, beating analyst expectations. It’s share price was hit hard on Thursday after Facebook’s results sent shudders through the tech sector. However, expect a large surge on Friday, pre-market pricing suggests that the stock could surge by more than 50% at the open. Likewise, Amazon said that its profits surged in the crucial Christmas trading period, and Q4 profits nearly doubled as the company managed to avoid supply chain woes and control labour costs. It reported revenues of more than $137bn for Q4, up from $125.6bn in Q4 2020, profits rose to more than $14.3bn, up from  $7bn a year ago. The company also signalled a positive outlook, which was warmly welcomed by the market. Its shares had slipped by more than 7% on Thursday, however, expect a bounce back on Friday, and in pre-market trading Amazon’s share price was up more than 14%. Thus, as we move forward in February, there could be more differentiation in tech investing, with profitable tech doing well, and unprofitable tech struggling. 

ECB’s hawkish pivot causes bond market rout 

Central banks were also in focus. Although the ECB did not hike interest rates today, a sharp selloff swept through global bond markets, including European bonds, as the market responded to signals from the ECB that it is stepping up its fight against inflation. ECB governor Lagarde, refused to rule out raising interest rates this year, a clear hawkish shift from the ECB, as signs emerge that central bankers are playing catch up to dampen inflation. ECB rates are currently -0.5%, the market is now expecting the ECB’s deposit rate to climb to 0.1% by the end of this year. The 2-year German bund yield climbed 12 basis points to -0.38% on Thursday, while the 10-year German yield surged to 0.14%, the highest level since 2019. However, the selloff in riskier Eurozone debt was more pronounced (yields rise when bond prices fall). Italy’s 10-year BTP yield jumped by an enormous 0.23%. For now, this is good news for the euro, but if it leads to a sovereign debt crisis it could add another layer of woe to the global economic outlook. 

The ECB and the euro 

While the market digests the hawkish pivot from the ECB, this is positive for the euro. EUR/GBP has jumped above 0.84 and is showing signs that the rally could persist into the end of the week. EUR/USD is also worth watching, especially as we wait for US payrolls for January, which could show a contraction in employment growth in the US, although economists expect a 145k increase in NFPs. While we do not expect a weak payrolls report to deter the Fed from raising rates in March, it could lead to a less aggressive rate path, for instance a 25bp hike rather than a 50bp hike. This could weigh on the dollar at the end of the week. EUR/USD is testing a key level of resistance at 1.1435, a break above here opens the way to a short-term move higher towards the November 2021 high at 1.1680. 

The oil price: a central banker’s headache 

Central bankers may look on in despair as we end the week as the oil price rises once again. US WTI oil is playing catch up with Brent crude, and rose more than 2% on Thursday to more than $90 per barrel. The Brent crude price is currently trading above $91 per barrel, and it is showing no signs of losing upward momentum. Of course, at these levels $100 per barrel is now in sight. Earlier this week, Opec agreed to further increase its production by 400,000 barrels per day, however, it will take much larger increases from Opec members to tame this oil market. Fears about unrest in the Middle East and the Russia/ Ukraine crisis continues to lead to a risk premium being added to the oil price, and we don’t see this risk receding any time soon. If $100 oil is around the corner, that means more inflation and more stock market volatility as we progress through Q1.