Earnings, central banks, growth: big week ahead

Chief Investment Officer's team
30 January 2023
earningscentralbanksgrowthbigweekahead

AT A GLANCE

  • Last week was, again, positive on most markets, led by cyclical asset classes
  • Economic and inflation data reinforced the narrative of slower monetary tightening
  • This week will see an avalanche of macro and company numbers as well as major central banks’ meetings

The month of January is about to end firmly in the green, and last week was, again, positive across most asset classes. Apart from DM government bonds, which printed a modest -0.2% weekly decline, all markets were in the green, led by stocks and listed real estate.

It looks like outright optimism. Indeed, the top down narrative is not adverse. Inflation is abating, and the global economy is overall resilient. Of course, US activity has started to feel the pressure from massive hikes in interest rates. But market participants are comforted by the idea that the worst is behind us, and that with a still very strong job market, the world’s largest economy can stomach the current slowdown. Elsewhere, flash PMIs were not as bad as expected in Europe, and high frequency data confirms a very dynamic reopening in China. All in, a benign top-down narrative meets a relatively light positioning from market participants.

The earnings season is in full swing and has not been great. Sales numbers are strong, but margins are contracting, leading to, so far, a year-on-year decline in corporate profits. The week ahead will bring much more color on that front, with almost a third of US companies reporting their numbers, including mega tech names. We will also get an avalanche of economic data: from January final PMIs to an update from the IMF, the US job report and Q4 GDP in the Eurozone. Finally, and crucially, rate decisions will come from the Fed on Wednesday, followed by the ECB and BoE on Thursday.

Our 2023 Global Investment Outlook will be out this week, and we hope to welcome you at our client events next Tuesday – we can’t wait to interact with you in person after 2 years of virtual format for our flagship annual presentation. Stay safe.

Cross-asset Update

Investor sentiment on gold has been pretty upbeat so far this year, with the yellow metal putting in a 5.6% gain in January and rising by almost 20% from its early November lows. The Fed’s drawing closer to the end of its tightening cycle was the main driver of the rally, that at accelerated speed has seen the nearly complete reversal of the losses recorded during the lengthy monetary tightening phase. Our year-end fair-value for gold, at USD1,950/oz, was substantially reached at last week’s highs, much ahead of time, and we would see only modest upside from current levels, unless at some point a war risk premium resurfaces.

With the full discounting of peak Fed rates, fresh catalysts are needed for gold to be pushed to new highs. Actually, we foresee a neutral-to-negative scenario in the next few months, with the US economy set to slow and real rates flattish to higher. Real macro variables are starting to deteriorate in the United States, under the lagged effect of tighter policy, as indicated by Friday’s 4Q22 GDP report and the falling industrial production and retail sales in the previous week’s release. At the same time, the disinflationary process that has finally started to take hold is proceeding apace, and according to the December Summary of Economic Projections, while the real growth rate is forecast to remain stable this year, core PCE inflation should fall towards 3.5%, so 90 basis points from current levels according to Fed projections. The yield on the US 10-year note could only possibly match that drop under a dire recessionary scenario. In summary, the plausible scenario is for real rates to rise or at best stabilize.

As for the US dollar, another key variable accounting for gold trends, most of its weakness due to improvements in global growth should also be behind us. European economic sentiment has improved on milder weather conditions, and China has reopened its economy much less gradually that initially thought. From now on the likely deterioration of the US outlook will play the lion’s share in determining the direction of global growth. Also, the cumulative effect of Quantitative Tightening, expected to occur to the tune of USD1tn per year, will at some point make itself felt in terms of lower market liquidity, a net positive both for the US dollar and real rates.

In summary, real yields and the dollar seem to be close to exhausting most of their positive impulse for gold. While we advise clients not to add to positions at current levels, we think that partial profit-taking and buying on pullbacks is a wise strategy. With no end in sight for the Russia-Ukraine war, it could be just a matter of time before the conflict becomes exacerbated, with gold in that case trading at a war premium as a primary safe-have asset. Also, inflationary pressures could resume next year, driven by the push for the green economy and deglobalization, secular factors exerting upward pressures on global prices and working against the effects of monetary policy.

Fixed Income Update

We are in the all-important central bank week, where three major banks finalize their rate decisions. Markets were relatively calm last week while pundits and markets differ on the magnitude of the hike coming from the Fed on 1st February. Some Fed watchers such as El-Erian have suggested the Fed go ahead with the 50 bps hike to front-load the tightening while investors stubbornly cling to the 25 bps narrative. Regardless of the amount of the hike, a downshift doesn’t mean a pause. Chairman Powell could remain hawkish in the post-meeting press conference. The speech would significantly push back against rate cut expectations for this year and focus on the perils of early easing. ECB closely follows on the heels of the Fed deciding its rate on 2nd February. BoE also decides on the same day. Both the ECB and the BoE could hike rates by 50 bps. The ECB could downshift a couple of meetings down the line, while the BoE could downshift as early as the next meeting according to market expectations.

Bond markets were relatively calm in the five days through Friday. US 10-year Treasury yields fluctuated around 3.5%. Most of the sub-segments traded in a tight range of OAS spreads. DM Govvies had a muted week as the relentless rally in treasuries stopped. Most of the other segments posted a muted 0.1% to 0.2% return. YTD Global HY leads the returns chart, followed by IG Credit and EM Debt. In a sign of how topsy turvy the fixed income returns have become, last year’s best performer, FRNs, sits at the bottom of the chart, while Asian HY, which had the dubious distinction of finishing last in 2022, stands first this year.

Last week the current US debt ceiling of $31.4 trillion was effectively reached. Subsequently, the US Treasury issued a Debt Issuance Suspension Period (DISP) notice up to 5th June. This provides headroom of $500bn, which, combined with cash reserves of $450bn, gives a runway till November. Without any congressional action, this would be the most severe threat to the economy as we approach default, or what is known as the Drop-dead date. But, unfortunately, the road to legislation is fraught with risks and brinkmanship.

Bond fund flows have remained very strong this year after the c.$250bn outflows that we observed in 2022. The outflow reduced the AUMs by close to 4% for such funds. The outflow was severe for actively managed funds that lost nearly 9.7% of End-2021 AUM, while passive funds or ETFs gained close to 10% of their AUMs. This year we have seen more than $35bn inflows to bond funds with a focus on IG Credit as it provides an attractive yield.

Equity Update

Markets in January have seen outperformance from Asia (China), technology, (semiconductor and EVs) and the consumer sector. Overall, sentiment was risk-on, with better than expected economic and earnings growth, and softening inflation alongside lower rate increases expected from the Fed, while the ECB that began tightening later has more to go. EM equities have outperformed at +10% YTD with the China rally +17% YTD. Sentiment around China has further improved during the Lunar New Year break with a strong rebound in holiday travel and consumption. Next focus is the National People's Congress in March, with a growth-friendly policy environment expected. India markets are down on account of the sharp selloff of Adani group stocks but it’s too early to comment on whether this would affect the broader market. We are tactically and strategically overweight India.

DM equities +7% YTD with the US indices bouncing back last week, following the previous negative week. The S&P 500 gained 2.5% with the Nasdaq almost double that. Tech performance was buoyed by EVs i.e. Tesla, Rivian and Semiconductors with the recent importance of OpenAI application to industry. Also, a soft landing is being priced in the US as data reinforce hopes that the US economy will cool enough to satisfy the Feds goal of slowing inflation, but not slip into a recession. Markets in Europe were mostly higher, adding to the region's strong start to the year. The Fed and ECB meetings this week are important for market direction, in terms of future direction and commentary on the economy.

Earnings are in focus with the UAE bank profits growing up to 40% y/y backed by strong net interest income gains and increased consumer lending. Dividend increases were announced. This has been one of our preferred investments and we see 2023 as another strong growth year for the UAE economy and equities as oil prices remain supportive and the increasing expat population is adding to consumer spend and personal borrowing.

US earnings have been mixed. Layoffs from the tech sector were back in focus, on lower IT demand post the pandemic’s accelerated digital shift and more broadly expense reduction plans. 26% of S&P 500 companies have reported Q4 2022, and the blended earnings decline is -5.0%, while the revenue growth is at 3.9% . Visa's earnings beat but, like Mastercard, its card spending slowed. IBM exceeded expectations and Dow Inc and Intel disappointed. Tesla offered an upbeat outlook. European earnings saw the semi companies with strong earnings growth and in the luxury segment LVMH had slower sales growth but organic sales exceeded estimates.

During the upcoming week, 107 S&P 500 companies are scheduled to report including big tech i.e. Apple, Amazon Meta and Alphabet. Tech margins remain above pre-pandemic levels but top-line growth is weak, especially for more cyclical segments like semiconductors and hardware. In 4Q, tech is expected to post 24.2% net margin vs 12.2% for the S&P 500 index. This is well above its pre-pandemic peak but below the Q4 202’s 26.4% mark. Semis and electronic equipment are likely to be the most below their pre-pandemic highs in 4Q22.

Written by:

IMPORTANT INFORMATION

This document is prepared by Emirates NBD Bank (P.J.S.C) (“the Bank” or “Emirates NBD”), licensed and regulated by the Central Bank of the UAE (“Central Bank”) and the Securities and Commodities Authority of the UAE (“SCA”) and subject to regulation, supervision and control of the Central Bank and SCA, having its head office at Baniyas Road, Deira, PO Box 777, Dubai, United Arab Emirates. This document may be distributed and/or made available by the Bank and its affiliates and subsidiaries, including Emirates NBD Capital KSA CJSC (“ENBD Capital”) (through its website, its branches or through any other modes, whether electronically or otherwise).

Emirates NBD and its affiliates, subsidiaries and group entities, including its shareholders, directors, officers, employees and agents are collectively referred to Emirates NBD Group.

Any person (hereinafter referred to as “you”, “your”) who has received this document or have access to this document shall acknowledge and agree to the following terms.

Reliance

Data/information provided in this document are intended solely for information or illustrative purposes and are not designed to initiate or conclude any transaction.

This publication may include data/information taken from stock exchanges or other third-party sources from around the world, which Emirates NBD reasonably believes to be reliable, fair and not misleading, but which have not been independently verified. The provision of certain data/information in this publication may be subject to the terms and conditions of other agreements to which Emirates NBD is a party. Opinions, estimates and expressions of judgment are those of the writer and are subject to change without notice. Emirates NBD or any member of Emirates NBD Group makes no representation or warranty and accepts no responsibility or liability for the sequence, accuracy, completeness or timeliness of the information or opinions contained in this publication. Nothing contained in this publication shall be construed as an assurance by Emirates NBD that you may rely upon or act on any information or data provided herein, without further independent verification of the same by you.

The contents of this document are prepared as of a particular date and time and will not reflect subsequent changes in the market or changes in any other factors, including those relevant to the determination of whether a particular investment activity is advisable. Emirates NBD does not undertake any obligation to issue any further publications or update the contents of this document. Emirates NBD may also, at its sole discretion, update or change the contents herein without notice. Emirates NBD or any member of Emirates NBD Group does not accepts no responsibility whatsoever for any loss or damage caused by any act or omission by you as a result of the information contained in this publication (including by negligence).

References to any financial instrument or investment product in this document are not intended to imply that an actual trading market exists for such instrument or product. Certain investment products mentioned in this document may not be eligible for sale in some jurisdictions, and they maynot be suitable for all types of investors. The information and opinions contained in this publication is provided for informational purposes only and have not been prepared with any regard to the objectives, financial situation and particular needs of any specific person, wherever situated. If you wish to rely on or use the information contained in this publication, you should carefully consider whether any investment views and investment products mentioned herein are appropriate in view of your investment experience, objectives, financial resources and relevant circumstances. You should also independently verify and check the accuracy, completeness, reliability and suitability of the information and should obtain independent and specific advice from appropriate professional advisers or experts.

Confidentiality

This publication may be provided to you upon request (and not for distribution to the general public), on a confidential basis for informational purposes only, and is not intended for trading purposes or to be passed on or disclosed to any other person and/or to any jurisdiction that would render the distribution illegal.

Solicitation

None of the content in this publication constitutes a solicitation, offer, recommendation or opinion by Emirates NBD to buy, sell or trade in any security or to avail of any service in any jurisdiction. This document is not intended to serve as authoritative legal, tax, accounting, or investment advice regarding any security or investment, including the profitability or suitability thereof and further does not provide any fiduciary or financial advice. This document should also not be used in substitution for the exercise of the prospective investor’s judgment.

Third Party

This publication is not intended for use by, or distribution to, any person or entity in any jurisdiction or country where such use or distribution would be contrary to law or regulation. It is the responsibility of any person in possession of this publication to investigate and observe all applicable laws and regulations of the relevant jurisdiction. This publication may not be conveyed to or used by a third party without the express consent of Emirates NBD or its affiliates, subsidiaries or group entities distributing this document. You should not use the data in this publication in any way to improve the quality of any data sold or contributed by you to any third party.

Liability

Notwithstanding anything to the contrary set forth herein, Emirates NBD, its suppliers, agents, directors, officers, employees, representatives, successors, assigns, affiliates or subsidiaries shall not, directly or indirectly, be liable, in any way, to you or any other person for any: (a) inaccuracies or errors in or omissions from this publication including, but not limited to, quotes and financial data; or (b) loss or damage arising from the use of this publication, including, but not limited to any investment decision occasioned thereby. Under no circumstances, including but not limited to negligence, shall Emirates NBD, its suppliers, agents, directors, officers, employees, representatives, successors, assigns, affiliates or subsidiaries be liable to you for direct, indirect, incidental, consequential, special, punitive, or exemplary damages even if Emirates NBD has been advised specifically of the possibility of such damages, arising from the use of this publication, including but not limited to, loss of revenue, opportunity, or anticipated profits or lost business.

This publication does not provide individually tailored investment advice and is prepared without regard to the individual financial circumstances and objectives of person who receive it. The appropriateness of an investment activity or strategy will depend on the person’s individual circumstances and objectives and these activities may not be suitable for all persons. In addition, before entering into any transaction, prospective investors should: (i) ensure that they fully understand the potential risks and rewards of that transaction; (ii) determine independently whether that transaction is appropriate given an investor’s investment objectives, experience, financial and operational resources, and other relevant circumstances; (iii) understand that any rates of tax and zakat or any relief in relation thereto, as may be referred to in this publication may be subject to change over time; (iv) consult their advisers on the legal, regulatory, tax, business, investment, financial and accounting implications of the investment; (v) understand the nature of the investment and the related contract (and contractual relationship) including, without limitation, the nature and extent of their exposure to risk; and (vi) understand any regulatory requirements and restrictions applicable to the prospective investor

Forward Looking

Past performance is not necessarily a guide to future performance and should not be seen as an indication of future performance of any investment activity. The information contained in this publication does not purport to contain all matters relevant to any particular investment or financial instrument and all statements as to future matters are not guaranteed to be accurate. Certain matters in this publication about the future performance of Emirates NBD or members of its group (the Group), including without limitation, future revenues, earnings, strategies, prospects and all other statements that are not purely historical, constitute “forward-looking statements”. Such forward-looking statements are based on current expectations or beliefs, as well as assumptions about future events, made from information currently available. Forward-looking statements often use words such as “anticipate”, “target”, “expect”, “estimate”, “intend”, “plan”, “goal”, “seek”, “believe”, “will”, “may”, “should”, “would”, “could” or other words of similar meaning. Reliance should not be placed on any such statements in making an investment decision, as forward-looking statements, by their nature, are subject to known and unknown risks and uncertainties that could cause actual results, as well as the Group’s plans and objectives, to differ materially from those expressed or implied in the forward-looking statements. Estimates of future performance are based on assumptions that may not be realized.

Risk

Data included in this publication may rely on models that do not reflect or take into account all potentially significant factors such as market risk, liquidity risk, and credit risk. Emirates NBD may use different models, make valuation adjustments, or use different methodologies when determining prices at which Emirates NBD is willing to trade financial instruments and/or when valuing its own inventory positions for its books and records. The use of this publication is at the sole risk of the investor and this publication, and anything contained herein, is provided "as is" and "as available." Emirates NBD makes no warranty of any kind, express or implied, as to this publication, including, but not limited to, merchantability, non-infringement, title, or fitness for a particular purpose or use.

Investment in financial instruments involves risks and returns may vary. The value of investment products mentioned in this document may neither be capital protected nor guaranteed and the value of the investment product and the income derived therefrom can fall as well as rise and an investormay lose the principal amount invested. Investment products are subject to several risks factors, including without limitation, market risk, high volatility, credit and default risk, illiquidity, currency risk and interest rate risk. It should be noted that the value, price or income of securities denominated in a foreign currency may be adversely affected by changes in the currency rates. It may be difficult for the investor to sell or realise the security and to obtain reliable information about its value or the extent of the risks to which it is exposed. Furthermore, the investor will not have the right to cancel a subscription for securities once such subscription has been made. Prospective investors are hereby informed that the applicable regulations in certain jurisdictions may place certain restrictions on secondary market activities with respect to securities.

Before making an investment, investors should consult their advisers on the legal, regulatory, tax, business, investment, financial and accounting implications of the investment. In receiving this publication, the investor acknowledges it is fully aware that there are risks associated with investment activities. Moreover, the responsibility to obtain and carefully read and understand the content of documents relating to any investment activity described in this publication and to seek separate, independent financial advice if required to assess whether a particular investment activity described herein is suitable, lies exclusively with the investor.

Intellectual property

This publication has been developed, compiled, prepared, revised, selected, and arranged by Emirates NBD and others (including certain other information sources) through the application of methods and standards of judgment developed and applied through the expenditure of substantial time, effort, and money and constitutes valuable intellectual property of Emirates NBD and such others. All present and future rights in and to trade secrets, patents, copyrights, trademarks, service marks, know-how, and other proprietary rights of any type under the laws of any governmental authority, domestic or foreign, shall, as between the investor and Emirates NBD, at all times be and remain the sole and exclusive property of Emirates NBD and/or other lawful parties.

Except as specifically permitted in writing, you should not copy or make any use of the content of this publication or any portion thereof or publish, circulate, reproduce, distribute or offer this publication for sale in whole or in part to any other person over any medium including but not limited to over-the-air television or radio broadcast, a computer network or hyperlink framing on the internet or construct a database of any kind. Except as specifically permitted in writing, you shall not use the intellectual property rights connected with this publication, or the names of any individual participant in, or contributor to, the content of this publication, or any variations or derivatives thereof, for any purpose. This publication is intended solely for non-commercial use and benefit, and not for resale or other transfer or disposition to, or use by or for the benefit of, any other person or entity. By accepting this publication, you agree not to use, transfer, distribute, copy, reproduce, publish, display, modify, create, or dispose of any information contained in this publication in any manner that could compete with the business interests of Emirates NBD. Furthermore, you should not use any of the trademarks, trade names, service marks, copyrights, or logos of Emirates NBD or its subsidiaries in any manner which creates the impression that such items belong to or are associated with you, except as otherwise provided with Emirates NBD’s prior written consent. You shall have no ownership rights in and to any of such items.

IMPORTANT INFORMATION ABOUT UNITED KINGDOM

This publication was prepared by Emirates NBD Bank (P.J.S.C) in the United Arab Emirates. It has been issued and approved for distribution to clients by the London branch of Emirates NBD Bank (P.J.S.C) which is authorised by the Prudential Regulation Authority and regulated by the Financial Conduct Authority (FCA) and the Prudential Regulation Authority in the UK. Some investments and services are not available to clients of the London Branch. Any services provided by Emirates NBD Bank (P.J.S.C) outside the UK will not be regulated by the FCA and you will not receive all the protections afforded to retail customers under the FCA regime, such as the Financial Ombudsman Service and the Financial Services Compensation Scheme. Changes in foreign exchange rates may affect any of the returns or income set out within this publication.

IMPORTANT INFORMATION ABOUT SINGAPORE

This publication was prepared by Emirates NBD Bank (P.J.S.C) in the United Arab Emirates. It has been issued and approved for distribution to clients by the Singapore branch of Emirates NBD Bank (P.J.S.C) which is licensed by the Monetary Authority of Singapore (MAS) and subject to applicable laws (including the Financial Advisers Act (FAA) and the Securities and Futures Act (SFA). Any services provided by Emirates NBD Bank (P.J.S.C) outside Singapore will not be regulated by the MAS or subject to the provisions of the FAA and/or SFA, and you will not receive all the protections afforded to retail customers under the FAA and/or SFA. Changes in foreign exchange rates may affect any of the returns or income set out within this publication. Please contact your Relationship Manager for further details or for clarification of the contents, where appropriate. For contact information, please visit www.emiratesnbd.com.

IMPORTANT INFORMATION ABOUT EMIRATES NBD CAPITAL KSA CJSC

Emirates NBD Capital KSA CJSC (“ENBD Capital”), whose registered office is at P.O. Box 341777, Riyadh 11333, Kingdom of Saudi Arabia, is a Saudi closed joint stock company licensed by the Saudi Arabian Capital Market Authority (“CMA”) under License number 37-07086 dated 29/08/2007G (corresponding to 16/08/1428H) to deliver a full range of quality investment products and related support services to individuals and institutions in the Kingdom of Saudi Arabia. ENBD Capital is subject to Capital Market Law, and Implementing Regulations in the Kingdom of Saudi Arabia

ENBD Capital’s contact details are T +966 (11) 299 3900 and F +966 (11) 299 3955.

This document may not be distributed in the Kingdom of Saudi Arabia except to such persons as are permitted under the Investment Funds Regulations issued by the Capital Market Authority.

The Capital Market Authority does not make any representation as to the accuracy or completeness of this document, and expressly disclaims any liability whatsoever for any loss arising from, or incurred in reliance upon, any part of this document. Prospective subscribers of the securities offered hereby should conduct their own due diligence on the accuracy of the information relating to the securities offered. If you do not understand the contents of this document, you should consult an authorised financial adviser.