Overview
1. The Federal Reserve (the “Fed”) is expected to continue raising rates
2. Geopolitical tensions persist between Russia and the West over Ukraine
3. The European Central Bank (ECB) hints at rate hikes in Q3 2022
4. Oil rallies as the conflict in Ukraine continues
5. Equities dropped following the Fed rate hike
6. Tech companies are the most impacted by rising rates
Policy & Geopolitics
The Fed started the rate hike
After raising interest rates by 0.25% in March and 0.50% in early May, the Fed is expected to hike rates by 0.50% in the next meetings.
U.S. inflation hit a record 8.5% year-over-year (YoY) in March while the conflict in Europe has increased pressure on energy and food prices, raising the likelihood of a 0.75% rate hike. However, Fed Chairman Jerome Powell favored several 0.50% hikes in the upcoming meetings.
The Fed will also start shrinking its large balance sheet in the most aggressive monetary policy tightening in decades to control inflation. The plan envisages the release of $47.5 million in treasury and mortgage-backed securities monthly starting in June, and $95 billion from September. In early March, Powell told Congress that the process would take about three years, representing $3 trillion in cuts.
The ECB confirmed that it will complete its net asset purchases in Q3 ahead of a possible rate hike, marking a turnaround from one of the world’s most dovish central banks as inflation reached new records for a third month at 7.5% year-over-year in March. The ECB wants to end its bond-buying program as soon as possible and start raising rates as early as July and no later than September. ECB President Christine Lagarde indicated that bond purchases should end in early Q3 with possible rate hikes this year. The governor of the Bank of Italy, Ignazio Visco, added that the ECB may end asset purchases in June.
Also, the euro fell to a five-year low against the U.S. dollar in April.
Geopolitical tensions persist between Russia and the West over Ukraine
As the conflict in Ukraine escalates, the European Union (EU) is planning new sanctions against Russia after some European countries were banned from importing Russian oil.
Gazprom, the Russian energy giant, has suspended supplies to Poland and Bulgaria, for failing to pay for their energy in rubles. Fears that other countries could be similarly suspended have caused gas prices to soar. European Commission President Ursula von der Leyen stated that the EU was ready for this situation and had been working to ensure alternative deliveries and gas storage.
The EU is undergoing difficult discussions on whether to ban imports of Russian crude within six months and refined products by year end, but needs the unanimous approval of all 27 EU states, which is challenging given the rift between members.
Macro Indicators
Robust job gains despite 40-year high Inflation
U.S. unemployment remained at 3.6% in April. The U.S. economy added 428,000 jobs in April, the same as in March for a 12th consecutive month of gains above 400,000. The leisure and hospitality sector had the largest monthly increase, adding 78,000 jobs in April, but remains 1.4 million jobs (8.5%) below pre-pandemic levels. The labor force participation in April also declined 0.7% to 62.2%, 1.2% below pre-pandemic levels.
In the prior 12 months, employers have added 6.6 million workers to their payrolls, the largest 12-month gain (aside from earlier in the pandemic) since 1939. US wages climbed 5.5% YoY in April while unemployment in the euro Area fell to a record low 6.8% in March 2022 from an upwardly revised 6.9% in February and 8.2% in March 2021.
Source: Sources: Federal Reserve Bank of St. Louis, Eurostat
*US as of April 2022; Euro Area as of March 2022
Inflation reaches 40-year record
Real GDP declined 1.4% in Q1 2022 following a 6.9% rise in Q4 2021 as net exports and inventory investment, which contributed strongly to Q4 results, normalized.
The increase in consumer spending, which comprises around 70% of the US economy, increased 2.7% in Q1 2022 from 2.5% in Q4 2021 as disposable personal income increased 0.8% in March.
U.S. retail sales rose 0.5% in March, below the upwardly revised 0.8% rise in February and market forecasts of 0.6%.
U.S. housing starts rose 0.3% to a seasonally adjusted annual rate of 1.79 million in March. Eurozone GDP grew 0.2% in Q1 2022, marginally below the 0.3% expansion in Q4 2021, amid soaring inflation and considerable supply disruptions due to renewed Covid-19 lockdowns in China and the war in Ukraine. Annual GDP increased 5.0% YoY in Q1 2022 following a 4.7% rise in Q4 2021.
The US Consumer Price Index (CPI) rose 8.5% in March, the highest since December 1981 and above market forecasts of 8.4%. Core CPI, which excludes food and energy, climbed 6.5% YoY in March, its highest since August 1982, from a 6.4% increase in February but below market expectations of 6.6%. Eurozone CPI reached a record 7.5% in March, driven mainly by energy and food prices. ECB president Christine Lagarde expects energy prices to remain high for the foreseeable future.
The IHS Market Manufacturing Purchasing Managers’ Index (PMI) increased to 59.2 in April from 58.8 in March in the US and to 55.5 from 56.5 in the euro area.
Sovereign bond yields rise amid investor concerns
U.S. 10-Year Treasury yields rose to 2.94% on April 19 with the start of the Fed rate hikes, closing at 2.93% at month end. Germany’s 10-year bund yields remained in positive territory, closing April at 0.94% due to surging inflation and the wider moves in the global bond market.
Source: Bloomberg
*As of April 30, 2022
Financial Markets
Equity markets decline amid hawkish policy shift
The S&P 500, Dow Jones and Nasdaq fell 8.8%, 4.8% and 13.3% in April, respectively as inflation reached a 40-year high of 8.5% and the hawkish policy shift by the Fed with a 0.25% rate hike in March and more expected in the next Fed meetings.
The STOXX Europe 600 fell 1.2% in April, while the UK FTSE100 rose 0.4%. The Chinese SSE Composite Index and the Japanese Nikkei 225 Index fell 6.3% and 3.5%, respectively, while the Hong Kong Hang Seng index fell 4.1%.
Credit spreads widening
IInvestment grade spreads widened to 1.41% at the end of April from 1.22% in March in step with the weakness in equity markets and concerns that rates will continue to rise, while high-yield spreads rose to 3.97% in April from 3.43% in March.
Oil prices reach new highs amid geopolitical tensions
Spot WTI and Brent crude oil prices rose from $100.28 and $107.91 per barrel, respectively, in March to $104.69 and $109.34 at the end of April. On April 11, WTI and Brent had dropped to their lowest level for the month at $94.29 and $98.48, respectively, but the conflict in Europe and the EU proposal to ban Russian oil imports pushed oil prices above $100 by month end.
Source: Bloomberg
* As of April 30, 2022
OPEC+ stuck to the previously announced schedule and released just over 400,000 oil barrels per day into the market, despite pressure to boost output to alleviate the rapid rise in oil prices.
Energy prices surged in the euro area as the conflict in Ukraine intensified. With Russia accounting for 25% of EU oil imports and almost half its gas, concerns mounted that Russia may restrict supplies in retaliation for sanctions and other measures. Energy prices in the euro area increased 38% YoY at the end of April.
Source: Bloomberg
* As of April 30, 2022
US dollar rises, gold falls, and Bitcoin plummets
The US dollar breached 100, ending at 102.96 on April 29, amid Fed rate hikes. Meanwhile, gold prices fell nearly 2% in April, to $1,912 following a stronger dollar and rising US bond yields. Bitcoin dropped 18% in April to $38,594.22, more than 40% below its all-time high of $68,789.6 on November 10.
Earnings
Mixed Tech earnings overall for Q1 2022
Apple Q1 2022 revenue increased 8.6% YoY to $97.3 billion, above the estimates of $93.9 billion (EPS of $1.52 vs estimate of $1.43). iPhone revenue increased 5.5% YoY to $50.6 billion. The declared cash dividend increased 5% to $0.23 per share.
Amazon Q1 2022 revenues grew 7.3% YoY to $116.4 billion, just above the estimate of $116.3 billion, while the EPS of $7.38 missed estimates of $8.36. Amazon could not beat consensus revenue estimates over the last four quarters.
Meta Q1 2022 revenues grew 7% YoY, its slowest since its 2012 IPO after consistent double-digit growth, to $27.9 billion, under analyst estimates of $28.2 billion. EPS of $2.72 was above expectations of $2.56. Facebook daily active users increased 4% YoY to 1.9 billion in March 2022.
Alphabet Q1 2022 revenues grew 23% YoY to $68.0 billion, in line with the expected $68.1 billion, while EPS dropped YoY to $24.62, below the estimates of $25.91. Meanwhile, Q1 EBITDA grew 24.4% YoY to $23.9 billion.
Microsoft Q1 2022 revenues grew 18% YoY to $49.4 billion compared to estimates of $49.1 billion, while EPS increased 9.4% to $2.22 against $2.19 expected. Office business offerings and Office consumer products and cloud services increased 12% and 11%, respectively. Total subscribers to Microsoft 365 consumer offerings were 58.4 million.
Tesla Q1 2022 revenues increased 87% YoY to $18.8 billion, beating estimates of $17.8 billion while the EPS of $3.22 EPS also beat expectations of $2.26. Gross profit margins rose to a record 32.9% with a gross profit of $5.5 billion in its main segment.
Financials deliver strong earnings amid rising interest rates
JP Morgan Q1 2022 revenues of $31.6 billion and EPS of $2.76 beat the estimates of $30.9 billion and $2.69, respectively.
Citigroup revenue of $19.2 billion and EPS of $2.02 beat the estimates of $18.2 and $1.55 , respectively.
Morgan Stanley revenues of $14.8 billion and EPS of $2.02 beating consensus estimates of $14.2 billion and $1.68, respectively.
Goldman Sachs revenue of $12.9 billion and EPS of $10.76 exceeded forecasts of $11.8 billion and $8.89, respectively.
Visa, Mastercard and American Express performed stronger than expected, confirming the economic recovery. Visa revenues of $7.2 billion and EPS of $1.79 exceeded the expected $6.8 billion and $1.65, respectively. Mastercard posted revenues of $5.2 billion, beating estimates of $4.9 billion, while the EPS of $2.76 was higher than the estimated $2.17. American Express revenues of $11.7 billion and EPS of $2.73 were above the forecast $11.6 billion and $2.44, respectively.
Mixed earnings for Energy while Industrials thrive
Exxon Mobil Q1 2022 revenues grew 53% YoY to $90.5 billion, under expectations of $92.7 billion. Exxon earned $5.5 billion during the first quarter despite a $3.4 billion after-tax charge related to its Sakhalin-1 operation in Russia.
Meanwhile, Chevron revenues increased 69% YoY to $54.4 billion, above expectations of $47.9 billion.
Caterpillar (often considered a barometer for the economic cycle) posted revenues of $13.6 billion and EPS of $2.88.
Sentiment
Consumer sentiment falls amid inflation fears
The Consumer Sentiment Index of the University of Michigan increased 9.8% in April to 65.2 from 59.4 in late March, but was still 26.2% below the 88.3 reading in April 2021. Consumers’ main concern remains inflation, followed by a weakened economy in 2022.
The VIX index rose to 33.4 in April from 20.6 in March following the beginning of rate hikes and expectations of more rate increases this year.
The month-end Fear and Greed Index (which uses seven factors including market momentum, safe-haven demand, and junk bond demand) showed “Fear” at 28 at the end of April as investors are fleeing risky stocks for the safety of bonds.
COVID-19
The number of COVID-19 cases and deaths fell significantly since their January highs.
US daily cases in April were substantially below the January peak of 800,000, with a seven-day average of 57,654 cases compared to 500,000 at the end of January. As hospitalization cases dropped throughout the country, many state leaders opted to ease their mask and proof-of-vaccination requirements.
Daily Cases in Europe have more than halved last month, from just below 790,000 in late March to 374,000 at the end of April. Most countries in Europe are dropping travel restrictions and mandatory testing requirements due to the mildness of Omicron infections.
April was a very important month for Southeast Asia as Covid cases declined and travel resumed. Airline bookings are rising to destinations like Malaysia, Thailand and Indonesia as those countries allowed quarantine-free entry for vaccinated travelers.
China remains affected by Covid-19 with 282% in cases to 26,935 at the end of April. China adopted a zero-Covid policy, implementing lockdowns in cities such as Shanghai.
The Month Ahead
1. Fed interest rate hikes
2. Talks to ban Russian oil import
3. Covid Crisis in China
Disclaimer
This presentation is provided to you by The Family Office Co. BSC(c) (“The Family Office”) for informational purposes only, and contains proprietary information that may not be reproduced, distributed to, or used by, any third parties without The Family Office’s prior written consent.
All information, figures, calculations, graphs and other numerical representations appearing in this presentation have not been audited and may be subject to change over time. Furthermore, certain valuations (including valuations of investments) appearing in this presentation are subject to change as they may be based on either estimates or historical figures that do not reflect the latest valuation. Although all information and opinions expressed in this presentation were obtained from sources believed to be reliable and in good faith, no representation or warranty, express or implied, is made as to their accuracy or completeness. The information contained herein is not a substitute for a thorough due diligence investigation. Past performance is not indicative of and does not guarantee future performance. Exit timelines, prices and related projections are estimates only, and exits could happen sooner or later than expected, or at a higher or lower valuation than expected, and are conditional, among other things, on certain assumptions and future performance relating to the financial and operational health of each business and macroeconomic conditions.
The Family Office makes no representation or warranty, express or implied, with respect to any statistics or historical or current financial data, whether created by The Family Office through its own research or quoted from other sources. With respect to any such statistics or data delivered or made available by or on behalf of The Family Office, it is acknowledged that (a) the investor takes full responsibility for making its own evaluation of the materiality of the information and the integrity of the quoted source and (b) the investor has no claim against The Family Office.
Amounts in currencies other than the US Dollar are translated using prevailing market rates as calculated by The Family Office or its service providers and may differ from the rates used by banks. The rates are indicative only and do not reflect the rates at which The Family Office would be prepared to enter into any transactions with other parties.
Certain information contained in this presentation constitutes “forward-looking statements,” which can be identified by the use of words such as “may,” “will,” “should,” “expect,” “anticipate,” “project,” “plans,” “estimates,” “intend,” “continue,” or “believe” or the negatives thereof or other variations thereon or comparable terminology. To the extent this presentation contains any forecasts, projections, goals, plans and other forward-looking statements, such forward-looking statements are inherently subject to, known and unknown, significant business, economic, competitive, regulatory and other risks, contingencies and uncertainties, most of which are difficult to predict and many of which are beyond The Family Office’s control and may cause actual performance, financial results and other projections in the future to differ materially from any projections of future performance, results or achievements expressed or implied by such forward-looking statements. Investors should not place undue reliance on these forward-looking statements. The Family Office undertakes no obligation to update any forward-looking statements to conform to actual results or changes in The Family Office’s expectations, unless required by applicable law.
The Family Office makes no representation or warranty, express or implied, with respect to any financial projection or forecast. With respect to any such projection or forecast delivered or made available by or on behalf of The Family office, it is acknowledged that (a) there are uncertainties inherent in attempting to make such projections and forecasts, (b) the investor is familiar with such uncertainties, (c) the investor takes full responsibility for making its own evaluation of the adequacy and accuracy of all such projections and forecasts so furnished to it and (d) the investor has no claim against The Family Office.
This presentation represents a summary of certain information, the full terms of which are contained in a Private Placement Memorandum that should be reviewed for a more complete understanding of the investments and their risks. In addition, this presentation does not constitute an offer to sell, or a solicitation to buy, any instrument or other financial product, nor does it amount to a commitment by The Family Office to make such an offer at present or an indication of The Family Office’s willingness to make such an offer in the future.
The Family Office is a Category 1 Investment Firm regulated by the Central Bank of Bahrain C.R.No.53871 dated 21/6/2004. Paid Up Capital: US$ 10,000,000. The Family Office only offers products and services to ‘accredited investors’ as defined by the Central Bank of Bahrain.