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Market wrap-up — February 13, 2023

Mixed performances last week.

Let’s start with London where the main equity index (FTSE 100) reached its record high as the UK economy avoided recession after showing zero Q4 growth. I’m as happy as any market participant when good news hits the wires, but I can’t help thinking it’s the only G7 countries that is still to get back to pre-covid GDP, so I would not call that success.

The US posted a negative week, it’s a first for the Nasdaq this year, pulled down by Meta, Alphabet and Amazon. Between these 3, the aggregated loss in market capitalization amounts to USD 220 billion. No wonder that crypto markets followed suit and dove. The orange coin is down 6% on the 7-day chart, Ethereum -8.5% and Binance Coin -10%. It is not the kind of sharp drop we have witnessed in the past, but still not a great week. There are several causes for that poor performance for risk-on assets.

Across the Atlantic, although we are still quite far from the debt ceiling deadline, this risk is starting to be priced by the market. Indeed, almost all economists are betting on a resolution of that tricky situation but the path to get there is still very uncertain. This is reflected in the United States Credit Default Swap (CDS) levels. Short term CDS levels went from 15 to 65bps, the highest level on the chart since the 2011. That was when heated debates took place before raising the debt ceiling by 900 billion dollars at a time when fiscal policies where needed to jumpstart the economy after the Great Financial Crisis.

Another reason for that mixed performance, after a few weeks of exuberance, trading floors are beginning to realize that central bankers might not make their life as easy as they thought. Fed funds are now pricing a terminal rate at 5.2% (versus 5% a month ago) as more hawkish comments hit the market. The President of Philadelphia Fed insisted on the fact that the FOMC would have to hike rates past 5% and keep them there for some time before price pressures fade away. But there is some good news. He also said that chances to control inflation without falling into recession are growing bigger.

On the earnings side, 50% of companies have already communicated their 2022 results. 70% of them could beat expectations, which is a good number but still falls short of both the 5-year and the 10-year average. On top of that, the margin by which expectations were beaten is at 1.50%, well below the 5-year average of 8.6%. Also, sales outlooks are a bit more conservative than they have been the past few quarters. Not grim, but far from bright.

This week, we have a few economic releases to focus on. I would pay attention to oil inventories as Putin decided to cut Russia’s production to remind the world that it is still a top oil exporter/producer, right after Saudi Arabia. That explains why crude prices gained 6% in a week.

But the focus of the week will be the CPI print on Tuesday. Economist are forecasting (hoping for?) a drop from 6.5% to 6.2%. We’ll see soon enough if they are right. Then, we’ll have retail sales and industrial production. Let’s where these will push the market.

Johan Thomyris



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