What happened in markets this week?

This has been the week where FX has taken centre stage. The dollar has surged to a near 20-year high, as the yen and Chinese yuen have both sunk on the back of central bank divergence. The pound and the euro are both looking vulnerable even though they are trying to claw back some recent losses on Friday. However, the dollar remains king, even if the market had gone too far too fast. Likewise, US stock markets staged an impressive rally on Thursday with the Nasdaq a particularly strong performer, after failing to sustain rallies for the rest of the week. However, the path of least resistance for risky assets are still to the downside in our view. Below we analyse the latest earnings data and give you our view on the short-term prospects for stocks and our view on the dollar and whether it can remain dominant.

1, Weak tech earnings 

As we wait for Amazon to start trading on Friday, we would note that its stock price is trading significantly lower in pre-market trading and is down more than 9%. Amazon posted its first profit loss since 2015 and its weakest rate of sales growth since 2001. The company is having to deal with surging labour costs after its hiring binge during the pandemic. It is also finding it harder to make a profit with its extra staff and its extra distribution and warehouse facilities that were also brought on board to deal with a surge in demand during the pandemic. Overcapacity is now weighing on Amazon results, with revenue from its main e-commerce business falling 3%. This is a sign of the long-term economic havoc caused by the pandemic and what happens when supply and demand are interfered with by governments. While lockdowns were necessary to avoid a human tragedy, the economic consequences will be felt this year as comparisons with last year, where Amazon, Apple et al reported record profits and revenues, continue to cast a pall on 2022 earnings.

Compared to Facebook/ Meta, who had a positive outlook, Amazon’s expectations for the future were dour, with the company pondering the extent to which consumers will continue to cut their online purchases as the cost-of-living crisis continues to bite. This suggests that downside earnings revisions could limit Amazon’s stock price from recovering any time soon, it also suggests that demand may not recover until inflation calms down. However, there is a lot of uncertainty when it comes to the peak for inflation, so Amazon shares could struggle for some time. 

Likewise, even the mighty Apple has been impacted by global events. Supply chain shortages and Chinese factory shutdowns could cost Apple up to $8bn in Q2, which is another sign that things may not get easier for some of the pillars of US stock markets in the coming weeks and months, and this could limit the amount of recovery available for the S&P 500. Interestingly, the dominance of the tech sector is very much a US phenomenon, hence why European stocks were better able to digest the weakness in Apple and Amazon shares on Friday compared to US markets. In contrast, the sector composition in Europe is more focussed towards energy companies and industrials, hence they can do well on the back of rising commodity and energy prices. Likewise, European shares were buoyed on Friday by news that China’s politburo, the decision-making body of China’s Communist Party, would make macro adjustments to achieve its economic targets and significantly boost infrastructure spending. This is music to the ears for European investors who are focussed on China right now, as it suggests economic stimulus is around the corner. Thus, we may see further European stock market outperformance compared to the US this quarter. 

2, FX – can the dollar remain king? 

As mentioned, the dollar index surged to a 20-year high this week as central bank divergence drove currency movements. The Chinese yuen has fallen by its steepest ever monthly level, it is down more than 4% so far this month and this is the biggest drop since the end of their US dollar peg, which ended in 2005. The prospect of mega stimulus from the Chinese government to deal with the economic fall out of the lockdowns is also weighing on the CNY. 

Looking ahead, the FOMC meeting this week could determine if the dollar has come too far too fast. Right now, the market thinks that the Fed will be the only central bank who’s plans to hike interest rates have real bite. We will learn more this Wednesday, particularly if the Fed is serious about hiking 50 bps at each of the next three meetings. If this is confirmed, then the dollar could rise, however, we could see an aggressive retracement of the buck in the coming days if the Fed tries to tone down its message and if 50 bp hikes are not likely after the May and June meetings. Thus, with fundamentals driving financial markets, the Fed will decide next Wednesday if the dollar remains king.