Funding Unsecured

Weekly Briefs
02 May 2022
8 min read
Funding Unsecured

On top of a surprise US GDP report, this week saw a whole host of Big Tech earnings: Microsoft, Alphabet, Apple, Meta, and Amazon all provided updates. So did Twitter, in what may be the social media company’s last public earnings update after it accepted Elon Musk’s $44 billion takeover offer. That, despite an unsolved mystery of how Musk is going to cover the $21 billion equity portion of the transaction. “Funding unsecured”, anyone?

Macro

Data out on Thursday showed the US economy unexpectedly contracted last quarter, declining at a 1.4% annualized pace – a far cry from the 1% growth economists were expecting. But looking underneath the hood reveals that things are not as bad as the headline figure suggests. That’s because the decline came largely from factors likely to reverse later in the year – like a surge in imports, decline in government spending, and slower pace of inventory investment. Meanwhile, consumer spending – the biggest part of the economy – rose an annualized 2.7% in the first quarter, compared with 2.5% at the end of 2021.

The US economy shrank for the first time since 2020 last quarter. Source: US Bureau of Economic Analysis

In fact, despite all the worries about inflation, it seems that American households are still shopping. That much is clear from the GDP data as well as the early clues we’re getting as companies report results. First, we had banks kicking off earnings season by saying household finances were in good shape. Bank of America, for example, noted strong spending on travel, entertainment, and restaurants.

Now, non-financial firms are all following suit in expressing confidence in the American consumer – even as price pressures mount. Procter & Gamble, for example, hasn’t seen an exodus from its premium-brand products. American Express, meanwhile, still sees solid travel demand.

Consumers shrugging off price increases matters for the US economy given that consumer spending accounts for around two-thirds of GDP. The summary: 1) American CEOs aren’t yet subscribing to the fear that red-hot inflation will ultimately tip the economy into recession; and 2) Thursday’s GDP data showed consumer spending actually accelerated last quarter.

Stocks

It was all about Big Tech this week. Let’s start with Twitter, which on Tuesday accepted Elon Musk’s $44 billion offer in one of the biggest ever internet acquisitions. Musk, who launched his takeover bid less than two weeks ago, wants to reform the social media platform to make it a mecca for free speech.

But there’s one mystery to the saga that remains unsolved: how is Musk going to cover the $21 billion equity portion of the transaction? Perhaps he’ll find some investors to buy the company with him. But a more likely scenario is that he’ll sell some of his stake in Tesla, which might be why the EV maker’s stock fell 12% on Tuesday.

Tesla's stock is down by 22% since April 4, when Musk disclosed that he increased his stake in Twitter. Source: Bloomberg

That same evening, both Microsoft and Alphabet announced their quarterly results. Let’s start with Microsoft, whose quarterly revenue and earnings both beat analysts’ forecasts thanks to strong demand for its cloud services. The firm’s two main cloud businesses, Azure and internet-based versions of Office, have become steady growth engines that help protect Microsoft from supply-chain issues currently hurting the availability of PCs and Xbox consoles. Azure – the second-biggest player in the market for cloud infrastructure services after Amazon Web Services – posted revenue growth of 46% last quarter compared to a year ago.

Microsoft also gave a bullish forecast that should help dispel some of the macro fears hanging over the tech sector: the firm predicted tech spending would remain robust even if economic growth slowed, as customers try to counter inflation by investing in systems to increase productivity and automate more of their operations.

In an inflationary environment, the only deflationary thing is software. Satya Nadella, CEO of Microsoft

Alphabet’s cloud business also posted strong growth, with revenue increasing by a better-than-expected 44% last quarter compared to a year ago. But slowing ad sales in Europe and poor performance by its YouTube video service both weighed on the company’s overall results: its quarterly revenue came in below expectations – a rare miss for Alphabet. And while it tried to calm investors with a $70 billion buyback of its own shares, it didn’t work: the company’s stock fell almost 4%.

YouTube's ad revenue growth plummets after years of soaring (the bars at the bottom show the YoY % change in quarterly revenue). Source: Bloomberg

Ad sales in Europe and YouTube’s revenue were both impacted by the outbreak of war – a one-off, rare event that arguably shouldn’t cause too much concern. But YouTube’s lackluster performance could be highlighting a more worrying trend for Alphabet: rising competition from TikTok, which is starting to challenge YouTube’s supremacy in online video. That’s forced it to pour resources into developing its own short-form video feature – called Shorts – to better compete with TikTok. It’s a slight deja vu moment: TikTok also previously forced Meta to pour resources into Facebook and Instagram to develop their own short-form video features.

Speaking of which, Meta reported results on Wednesday and again reiterated that TikTok is providing serious competition for young users’ attention. Meta’s revenue came in below expectations, growing at its slowest quarterly pace since the firm went public. But the only thing investors seemed to care about is a return to growth in Facebook’s daily active users. That matters because Meta shocked investors back in February when it said daily users for its core Facebook service declined slightly in the fourth quarter for the first time. That raised the possibility that the main social network had peaked in popularity, but the reversal in fortunes was enough to initially send Meta’s shares almost 20% higher.

After declining slightly in the fourth quarter, Facebook's daily active users picked up again last quarter. Source: Bloomberg

Shares in Amazon fell as much as 10% after the company reported its slowest revenue growth rate for any quarter since the dot-com bust in 2001, and gave a weaker-than-expected outlook. While its cloud business continued to post solid growth, its ecommerce business struggled as the pandemic era boom in sales starts to fade and as transport and labor costs surge.

On the same evening, Apple reported sales and earnings that both topped forecasts, with revenue in almost every product category growing during the quarter. The firm also authorized a $90 billion share buyback program, sending its share initially higher. But those gains were soon wiped out after Apple warned that supply constraints would cost sales by $4 billion to $8 billion during the current quarter.

Commodities

We need to talk about the war’s impact on energy again. Russia halted natural gas supplies to Poland and Bulgaria on Wednesday, after the two countries refused Russia’s demand to pay for the fuel in rubles. To no trader’s surprise, the move sent European gas prices surging more than 20%. The question now is, which countries will be hit next? Germany is massively dependent on Russian gas and has raised the prospect of rationing fuel to its giant economy if flows are cut.

Share of natural gas imports coming from Russia in 2020. Source: Bloomberg

Another consequence of the war is that it’s reviving the world’s addiction to coal – a dirty fuel many thought would soon be phased out. Demand has been increasing since last year thanks to a natural gas shortage combined with a surge in electricity use after pandemic restrictions were rolled back. But the Russia-Ukraine conflict is turbocharging the coal market, leaving power producers scrambling for supplies and pushing prices to record levels. And that was before Russia’s decision to halt natural gas supplies to Poland and Bulgaria…

Coal demand by region. The dirty fuel is making a comeback due to an economic rebound, the war in Europe, and a natural gas shortage. Source: Bloomberg

Crypto

This week a news story broke out that could have big implications for bitcoin demand: Fidelity Investments – one of the largest investment firms on the planet – will allow investors to allocate part of their 401(k) into bitcoin later this year, according to the Wall Street Journal. A 401(k) is a very popular retirement savings account in the US, and one that’s offered by employers to their employees. They provide tax benefits and, in many cases, employers match workers’ contributions to the account.

The news is huge for two key reasons. First, Fidelity manages retirement programs for nearly 23,000 businesses. That's a whole lot of businesses, each with hundreds or thousands of employees with 401(k)s. Second, it could push other investment firms to follow suit, further bringing crypto investing into the mainstream.

Next week

Note that many European markets will be shut on Monday for a bank holiday. On the economic front, we have the monthly US jobs report on Friday which will provide us with important clues on the health of the American labor market. But perhaps the biggest thing on the agenda is the Federal Reserve meeting. The US central bank is expected to hike interest rates again, but the key question is by how much – 25, 50, or even 75 basis points? It’ll be joined next week by the Bank of England, which is also expected to raise interest rates in what would be its fourth meeting in a row.

General Disclaimer
The information and data published in this research were prepared by the market research department of Darqube Ltd. Publications and reports of our research department are provided for information purposes only. Market data and figures are indicative and Darqube Ltd does not trade any financial instrument or offer investment recommendations and decision of any type. The information and analysis contained in this report has been prepared from sources that our research department believes to be objective, transparent and robust.

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