05 January 2023
US large-cap S&P 500 closed 0.75% UP ▲ Tech-heavy Nasdaq Composite closed 0.69% UP ▲ Pan European STOXX Europe 600 closed 1.38% UP ▲ HK’s Hang Seng Index closed 3.22% UP ▲▲▲Japan’s Nikkei 225 closed 1.45% DOWN 🔻
📊 IN THE MARKETS
Santa Rally, Fed minutes, Eurozone inflation, UK inflation (and mince pie sales), HK bull, MuskeyFitt Morning, 🎓Positive Cashflow
Quelle Surprise! Eurozone inflation heading down
📖 MoneyFitt EXPLAINS
📊 IN THE MARKETS
The Santa Claus Rally is A Thing! It’s when stocks rise in the last 5 trading days of one year and the first 2 of the next… The S&P500 closed at 3822.39 on 22-Dec-22 and in the 7 trading days since then, we’ve gained all of 31 points or 0.80%. Ho! Ho! Ho! That may sound a little sad, but in a 250 trading day year, growing at that exact same pace would give us an annualised return of 33%, wiping out our miserable 19.44% loss in 2022 and leaving us with a 7% gain over the two years. (Not a forecast, just maths!) First round’s on Santa.
In fact, the Santa Claus Rally was set to be slightly stronger up until the 2pm release of the minutes of the last FOMC meeting. That meeting was in mid-December when the Fed (the US central bank) raised interest rates by 50 basis points to a range of 4.25% to 4.5%. Each “basis point” is 0.01% so that was a hike of 0.50%, after four consecutive hikes of 0.75% each. The minutes added colour to what we pretty much already knew, and showed that the Fed officials who decide interest rate policy want to see “substantially more evidence” before they are convinced the dreaded inflation is truly under control.
The “Dot Plot” of their interest rate projections (already released back in December) suggests a total of at least 0.75% higher interest rates before they stop, with rate cuts not expected until 2024. Inflation projections (below) are more interesting. Traders will speculate endlessly from now till the next rate decision in early February whether we will see a 25 or 50 basis point hike.
All this despite evidence that inflation appears to have peaked, which is why market strategists worry that the Fed –feeling a bit sensitive about its shockingly sluggish response to the early signs of inflation in late 2021, which it dismissed as “transitory” at the time– may accidentally shove a fragile economy into a deeper-than-necessary recession. The market is clearly not entirely convinced by Fed Chair Jay Powell’s assurances that “a soft landing” is still a possibility. This happens when the economy slows, inflation comes down and unemployment 🎓, the other part of the Fed’s “Dual Mandate”, doesn’t go through the roof.
(As of now, the US labour market remains red-hot, with 1.7x more job openings than job seekers, with strength in both manufacturing and services. This worries The Fed. Manufacturing contracted for in December, the second month in a row, though, according to a PMI survey. This worries the markets.)
Traders were encouraged by inflation data from France, which came in a touch below expectations. This followed encouragingly low numbers (meaning under 10%) from Germany and Spain to suggest that the European Central Bank may be able to ease up on its rate hikes by summer and keep the impending recession shallow. Traders like. (See Focus below.)
UK INFLATION. INSERT FAVOURITE FACEPALM EMOJI.
Across the Channel, though, UK food price rises soared to a record 13.3% in December, up from 12.4% in November. The British Retail Consortium said high prices for animal feed, fertiliser and energy fed into higher prices of many essential foods in supermarkets, adding to the pressure on UK households during the festive shopping season. The annual inflation rate for fresh produce shot up to a new record high of 15% in December, from 14.3% in November. And the BRC warned of further increases in 2023.
Soaring food prices and wages significantly lagging record inflation (meaning “real” wages are going down, back to 2006 levels according to PwC) are sending more UK shoppers to discount retailers such as German discounters Aldi and Lidl, as well as trading down to supermarkets’ own label products.
Aldi reported UK+Ireland Christmas sales up by 26% in December to over £1.4bn for the first time. They sold 48 million mince pies, 38 million pigs-in-blankets and more than 1,700 tonnes of Brussels sprouts in the weeks leading up to Christmas. The World Cup led potato crisp and nut sales up more than 40%, while sales of cheese increased by about 50%. Interesting data.
Hong Kong stocks were up by more in a day than Europe has risen since the start of the year. On Wednesday the benchmark Hang Seng Index jumped 3.2% to its highest since July, with China stocks extending gains on Covid reopening and recovery euphoria (despite distressing reports of the death rates on the Mainland, including many celebrities.) Tech giants like Alibaba and Tencent rallied after Jack Ma’s Ant Group reportedly received approval by Chinese regulators to raise RMB10.5 billion, which the market took as a signal of the end (for now) of Beijing’s crackdown on big tech firms.
1/ The head of Saudi Arabia’s Public Investment Fund has been subpoenaed to testify at the trial over Elon Musk’s weird 2018 tweet claiming he had “funding secured” to take Tesla private at the hilarious (to Musk) price of $420 per share (which of course never happened.) TSLA is currently trading at $114 (up 5% today.)
2/ Musk’s SpaceX is raising $750 million in a new funding round that values the company at $137 billion, according to CNBC. This is higher than the $125 billion valuation SpaceX had in its previous funding round last year, which is quite a feat considering markets overall, tech especially and, well, Musk in particular.
3/ Funds managed by Fidelity Investments were among the equity investors backing Musk’s takeover of Twitter at the end of October, but monthly valuations showed that by the end of November, Fidelity had already slashed its internal valuation of Twitter by 56%. Musk, who tried for months to squirm out of the deal agreed in April, said ahead of the closing that he and his investors were “obviously overpaying” for the company.
4/ Twitter’s costs are still being slashed and offices and other properties (including one of Twitter’s largest data centres, which may have contributed to a recent major outage) are being shut down to save on rent. Musk is also saving money on cleaning and security services. He’d said in November that bankruptcy was a possibility if Twitter couldn’t achieve “positive cash flow 🎓.” The New York Times reported that with janitors gone, some “workers have resorted to bringing their own rolls of toilet paper from home… The smell of leftover takeout food and body odor has lingered on the floors … bathrooms have grown dirty.”
🎓Mini-Explainer: Positive Cashflow
Cash flow refers to the actual flow of cash in and out of a company. It is a, important measure of a company’s financial health and its ability to pay its bills and make payments on its debts.A company can have negative accounting profits but positive cash flow, and vice versa.Accounting profits refer to the amount of money that a company makes according to its financial statements. This amount is calculated by subtracting a company’s expenses from its revenue. Some expenses are not paid in cash, such as depreciation or stock-based compensation, so accounting profits do not always reflect a company’s actual cash flow.
Quelle Surprise! Eurozone inflation heading down
On Tuesday, German inflation slowed more than expected to 9.6% in the year to December, from 11.3% in November (and a peak of 11.6% in October, a seven-decade high), making it back into single digits for the first time since summer on gas price controls. Economists were expecting a 10.7% rate, so a positive surprise for markets, following a similar surprise in Spain. Energy prices were still a crazy 24% higher than in December 2021, but at least it’s less than the 44% year-on-year rate seen in September. Unemployment 🎓 fell, though remained elevated at 5.5%.
Lower energy prices also helped inflation down in France, which fell to 6.7% in December, another pleasant surprise considering economists were expecting a slight rise to 7.3% from a 7.1% rate in November. France basically did things right with earlier and more aggressive government energy subsidies, which kept consumer prices from surging to double digit rates the way they did across much of the rest of Europe.
December inflation for the whole Eurozone area will be out on Friday, with economists polled by Bloomberg expecting a 9.5% rise, off the October peak of 10.6% and the lowest print since August. Eurozone inflation has been helped by unseasonally warm (miserable skiing) weather, giving markets hope that the European Central Bank will be able to stop raising rates before the summer, hence the bullish start to the year, with the STOXX Europe 600 up 3.11% since the end of 2022.
Though overall inflation is down because of falling energy costs, underlying price pressures for other goods and services haven’t come down. Core (non-food and energy, which can be volatile) inflation rose in Spain. Services inflation (largely wages) was higher in Germany, though lower in France. Rates are still going higher.
Thank you for spending a few minutes of your time with us. Remember to take time for yourself and be thankful for what you have.
📖 MoneyFitt EXPLAINS
Unemployment, is defined as people of working age who are not in either paid employment or self-employed but ARE available and actively seeking work.
It is measured by the unemployment or “jobless” rate, the number of people unemployed as a percentage of the labour force, which is the total of people employed and unemployed. (The labour force as a percentage of the entire working-age population is the “participation rate.”)
Unemployment can be caused low demand during business cycles or for structural or technological reasons when certain people stop being employable.
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