Please see today’s Brooks Macdonald Daily Investment Bulletin received earlier this morning (28/10/2022):
What has happened?
Bond markets continued to price in a heightened probability of a Federal Reserve ‘pivot’ as signs emerged of a more dovish tone within the ECB. Despite this bond market pricing, concerns about the forward guidance from major US technology companies dampened the mood with the US index falling and Europe ending the day in slightly negative territory.
US Tech earnings
Meta (Facebook) fell by almost a quarter yesterday after its poorer than expected earnings report released on Wednesday. Last night saw Apple and Amazon report with Apple producing a report that largely satisfied the market, particularly given growing concerns that Apple may join the other tech heavyweights in a disappointing release. Amazon however guided that Q4, a critical quarter for retailers given the build up to Christmas, would be much weaker than markets had been expecting. Amazon fell by almost 13% in after-hours trading which is a remarkable fall in market capitalisation given the company’s c. $1tn size.
The ECB
The press conference that followed the ECB statement contained some more dovish language, which was welcomed by the bond market despite the central bank raising interest rates by a further 75bps, in line with expectations. Specifically the conference focused on the downside risks to economic growth, the lagged impact of interest rate hikes and more generally a less aggressive tone regarding future tightening of monetary policy. The bond market concluded that the ECB was getting closer to its terminal rate for this cycle and reduced expectations of that rate down to 2.6%. As a result, the euro underperformed and bond yields fell across Europe. Italian government bonds which have been under pressure due to higher interest rate expectations, outperformed German bunds. The ECB also said that the principles around quantitative tightening would be discussed in December, giving a sense that actual implementation could be a little way away still.
What does Brooks Macdonald think
With the ECB sounding more balanced, the key question is whether Fed Chair Powell follows suit next week. A 75bp rate rise still looks highly likely however what the Fed will do in December is now up for debate. It is tricky for the Federal Reserve to commit to too much next week as there are two months of inflation and employment releases between the November and December meetings. Bond markets are used to Powell delivering a rebuke in his press conference, even the absence of that could be taken very positively by the still skittish bond market.
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Carl Mitchell – Dip PFS
Independent Financial Adviser
28/10/2022