Wild market swings to continue

Eye-catching moves in response to earnings have dominated the market zeitgeist this past week, but this level of volatility is unnerving and generates further uncertainty. At times like this it’s easy to miss the forest for the trees and worth zooming out to look at the bigger picture.

Facebook plunged while Amazon surged!

But… Amazon is still -5.44% this year. Facebook is down by nearly 30% year to date. Netflix is down by 31%. Even mega cap Microsoft is trading 9% down on the year. Tesla has also lost 12% in 2022.

And looking through the S&P 500, there’s really not much to cheer about so far in 2022. Finance behemoths like Bank of America (BAC), American Express stand out alongside payment providers Visa & Mastercard. Buffett’s Berkshire Hathaway is ticking along nicely too.

But if we look at the year to date performance on this heat map the real bright (green) spot is energy:

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Exxon (XOM) up by 33%, Chevron (CVX) adding 15%. ConocoPhillips (COP) shares have jumped by 27% too. Industry stalwart Occidental (OXY) is up by a gargantuan 40% in 2022 so far!

Interestingly, FactSet shows that analysts are turning more pessimistic about the path ahead too. For the first time since Q2 2020, the bottom-up EPS estimate decreased in the first month of the quarter.

Nothing severe, but another chink in the armour. During January, analysts downgraded their Q1 EPS estimates by 0.7%. And those estimates show a decline in seven sectors, and an increase in only four sectors

At the sector level, four sectors recorded an increase in their bottom-up EPS estimate for Q1 during the first month of the quarter, led by the Energy (+5.9%) sector. On the other hand, seven sectors recorded a decline in their bottom-up estimate for Q1 during this period, led by the Industrials (-10.1%) sector. (FactSet)

All else equal, analysts think financials are set to flatten off, while energy will continue to outperform. Best not to mention Industrials. Ouch!

In isolation, this isn’t all that significant. Against a backdrop of high uncertainty however, it’s another small sign of fading positivity about future corporate earnings.

The ECB’s hawkish pivot last week sent Eurozone yields soaring right across the curve. The move in Italian 2 year bond yields was astronomical!

And the euro had a storming week too. Even ahead of the ECB meeting the single currency was looking perky. Lagarde’s press conference sealed the deal. Look at this for a weekly candle!

The euro gained 1.2% on ECB day, and closed out the week with a 2.7% advance. Positioning data suggests traders see further upside ahead. Even before the meeting, CFTC positioning was at six-month highs yet still a long way from the extremes.

Hike until something breaks?

Synchronised tightening from central banks in developed economies at a time of continuing uncertainty is an interesting mix. Markets will have to contend with a rapid shift to higher interest rates just as economic growth slows and high energy prices weigh on activity and consumption.

And geopolitical tensions won’t help either. Russia’s military still sits on Ukraine’s border, and Putin was very cosy with Xi at the Olympics. The “DragonBear Alliance” is on.

In the world’s largest economy, Biden’s administration is struggling to pass the Build Back Better plan & extraordinary fiscal transfer payments are no more. Child tax credits expired at the end of 2021, and now student loan payments are about to be reinstated.

These factors will squeeze the US consumer all at once. Fiscal and monetary contraction with a side order of high energy bills really doesn’t inspire confidence in the outlook for overall spending.

Even if consumers are keen to spend, the ongoing supply chain issues (still) mean that companies may struggle to service that demand.

And even then, will they be able to pass on the higher production and labour costs so they can turn a profit?!

Jeff Currie, Goldman Sachs head of commodities, told Bloomberg that he’d never seen commodity markets like this: “I don’t care if it’s oil, gas, coal, copper, aluminum, you name it we’re out of it.”

Futures markets are also in “super-backwardation” signifying that buyers are paying up to get the materials “now” rather than locking in future supply at lower prices.

Liquidity drying up…

Less liquidity in the S&P 500 futures market means wider spreads and more volatility. CME’s Liquidity Tool shows that liquidity has decreased lately.

It looks more complicated than it is. Basically, the higher the dots are on the y axis, the worse the liquidity is. At a time when policy is being tightened globally, and uncertainty is high this makes sense. And it feeds into volatility.

Here’s a chart of the S&P 500.

Look at the difference between the two highlighted areas. Back in October (blue), liquidity was plentiful and the candles /trading ranges were smaller. Volatility picked up towards the end of the year, but there’s a marked change in behaviour in 2022 (red).

Long wicks in both directions & wild market swings make this a very challenging environment. And then there’s the data to account for.

After Friday’s NFP headlines showed that 467,000 jobs were added to the US economy (despite omicron), there were a whole host of factors to mislead the headline-watchers. Seasonal adjustments, revisions to prior data, and updates to population estimates all influenced the headline.

In reality, the US saw a 272,000 decrease in employment levels. Regardless, rates markets reacted and quickly priced in a 34% chance of a 50bps hike at the March Fed meeting (vs 18% chance pre-payrolls report).

Looking around, it’s hard to see where the clarity comes from. Market commentary ranges from a Goldilocks scenario (post-pandemic boom) to a complete bust scenario where demand falls off a cliff edge. Then there’s the wildcard situations with China’s economic worries far from over and a war over Ukraine still a possibility.

With such a wide range of opinions about the future, perhaps these big market swings will be with us for a while longer…

Not investment advice. Past performance does not guarantee or predict future performance.