Take Five: Profits, Returns and COVID-19
It didn’t take long for the slowdowns to appear as markets accelerate for 2022. Rising US Treasury yields, sparked by growing speculation that the Federal Reserve could begin its rate hike cycle as early as March has extinguished the enthusiasm from the start, just as the profit season in the US is about to kick off.
And the unrest in Kazakhstan has put geopolitical risks back on the agenda, as China struggles to keep its zero COVID strategy on track ahead of the Winter Olympics.
Here’s your week ahead at the markets of Tom Westbrook in Singapore, Lewis Krauskopf in New York and Dhara Ranasinghe, Tom Wilson and Karin Strohecker in London.
1 / QUARTERLY MONITORING
Massive increases in US corporate profits helped fuel last year’s 27% gain in the S&P 500. As the earnings season kicks off in the next few days, companies are likely to struggle to post similar numbers for the fourth quarter.
S&P 500 company profits are expected to jump 22.3%, according to Refinitiv IBES – a solid increase, albeit a lower clip than in the first, second and third quarters.
The big Wall Street banks JPMorgan, Citigroup and Wells Fargo will be the first to report. Investors want to know if companies believe the supply chain bottlenecks that helped drive prices up last year will ease in the coming months and forecast for 2022. Profit growth of the S&P 500 is expected to slow to 8.4% from 49.7% in 2021.
2 / AT WHAT HEIGHT?
The first week of trading in 2022 has been anything but boring for the world’s largest bond markets. Short-term Treasury yields have hit record highs since early 2020, 10-year yields are up more than 20 basis points, the German Bund yield at -0.06% is approaching 0% and Britain’s sovereign borrowing costs to Australia are several months high.
The message is clear: a tightening of monetary policy is likely sooner than expected, led by the United States. Until data or central bank rhetoric contradicts this, 10-year Treasury yields could soon hit the 2% mark.
Investors will also keep a close on real returns, as the idea that inflation-adjusted returns will stay low has fueled the rally in risky assets. The 30bp jump in US real yields in the first week might not be a good year for some.
3 / NEW YEAR, OLD RULES
For millions of Chinese, the new year started as the old one ended – under lockdown. Cases of COVID-19 are few, especially of the Omicron variant, but restrictions are spreading quickly as authorities maintain a zero tolerance policy ahead of the Winter Olympics next month.
Xian has been in lockdown for more than two weeks, and strict rules are in place in central China. The 400,000 residents of Yongji, Shanxi province, were ordered to stay indoors this week after the virus was detected on a railroad turnstile.
The measures could make any further easing of producer price hikes in December data due Wednesday, especially if they trigger further supply chain disruptions around the world, moot.
4 / KAZAKHSTAN AND BEYOND
Deadly protests in Kazakhstan – the worst violence in its 30 years of independence – have added to the list of outbreaks in the region felt far beyond its borders.
Once again, Russia is playing a key role. The Kremlin’s deployment of troops is widely seen as a gamble to secure its interests in the oil and uranium-producing Central Asian nation.
Repercussions are being felt in commodity markets and weighing on the ruble as Russia finds itself back in the limelight – tensions over Ukraine have taken a heavy toll on its markets. The outcome of the unrest in Kazakhstan is not yet clear, but markets will have to sift through the fallout from geopolitical risks and diplomatic alignments for some time to come.
5 / THE WAR OF LIFE IN BITCOIN
After a wild 2021, bitcoin’s New Year’s hangover has dragged on into the first week of 2022 – and could get worse.
Its network’s computing power fell sharply this week as Kazakhstan’s internet was shut down during its uprising, hitting its cryptocurrency mining industry – the second largest in the world.
The drop in bitcoin’s hashrate could, in theory, affect its price. The more miners there are on the network, the more computing power is needed to mine new bitcoins. If the miners leave the network, it becomes easier for the remaining miners to produce new parts, which in theory increases the supply.
Bitcoin fell below $ 41,000 to its lowest level since late September, with hawkish signs from the Fed adding to the unease. Some see it slipping further into the $ 30,000 range. Crypto investors will be looking for signs that bitcoin may be breaking off the ropes.