A solid week for equity markets and bonds around the world and conditions seem set up for a continuation this week, though a new US debt limit brawl in Washington could hit confidence later in the week.
Markets have been a bit frothy in January following data showing a slowdown in inflation in the euro zone a fortnight ago and last week’s fall in US consumer price inflation in December.
The latter was a pleasant surprise for investors and while Friday’s quarterlies from a quartet of major banks revealed higher bad debt provisioning, they had slightly better underlying results.
Wall Street had another good week and quarterly earnings will again be a test this week with reports from two banks – Goldman Sachs and Morgan Stanley tomorrow (Tuesday) and Netflix’s latest subscriber numbers and revenue figures in its 4th quarter report on Thursday.
Netflix is the key – if it misses its forecast for 3.50 million new subscribers, tech stocks will sell off (as they did after Netflix’s poor figures earlier in 2022), prompting investors to again fret about the economy, consumer spending, employment, inflation and the Fed’s interest rate increases.
A good report from Netflix and investors will continue their optimistic surge into shares.
But even if Netflix delivers, there’s still the further tests of investor confidence to come from results from Meta, Apple, Amazon and Alphabet later this month and in early February.
Tesla shares fell 0.9% on Friday after it revealed cost cuts for its US produced EVs – these came a week after a second round of price cuts in China since last September. That saw Tesla shares lose another 10% last week.
Tesla’s cuts were up to 20% for some model types and come as the company has been overtaken by BYD, the big Chinese rival and by rising sales from other producers like Ford, GM, BMW and VW in the US market.
These and other rivals are expected to boost their sales this year, adding to the pressures on Tesla and Elon Musk just as his $US44 billion Twitter deal threatens to worsen.
But the big story from midweek onwards will be the US reaching its statutory debt limit this Thursday.
Treasury Secretary Janet Yellen on Friday notified Congress that the U.S. will reach its statutory debt limit on Thursday.
That will see the slim Republican majority in the US House of Representatives use the deadline to try and embarrass the Biden administration but that could hit Wall Street hard and derail the current rebound.
All of the major indexes ended in the green after beginning Friday’s trading session in the red.
The Dow added 112.64 points, or 0.33%, to 34,302.61 by Friday’s close. The S&P 500 rose 0.40% to 3,999.09, and the Nasdaq Composite advanced 0.71% to 11,079.16.
The S&P and Nasdaq each posted their second consecutive positive week and the best weekly performance since November.
After its 34% slump in 2022, the tech-heavy Nasdaq was the out performer for the week jumping 4.82%. That pushed the Nasdaq up 5.85% for 2023 so far.
The S&P advanced 2.67% last week (up 4.1% so far this year), and the Dow added 2% to be up 3.5% for the year so far.
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Friday saw the ASX 200 end 47.7 points, or 0.7 higher to end the week 7,328.1.
That left the index up 3.07% for the week and 5.50% for the year so far with the surge in some commodity markets dragging it higher.
Wall Street’s good day Friday saw the ASX 200 futures leave the Share Price Index with a 28-point gain by the close.
That suggests a reasonable start to the new week’s trading later today.
The Australian dollar also bounced late last week in the wake of the weaker US consumer inflation data, ending the week just short of 70 US cents.
The Aussie ended at 69.82 on Saturday morning, up 2.45% so far in 2023.
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Friday saw JPMorgan Chase & Co (JPM), Bank of America Corp, Citigroup and Wells Fargo reported profits ranging from up 6% to down 50%. Strength in trading income helped offset the expected slump in investment banking, while interest rate hikes by the US Federal Reserve helped interest income, with a bigger boost to come from this area in 2023.
JPM profit beat estimates, rising 6% on trading strength and said it would resume share buybacks. Bank of America reported a 2% rise in profits as higher rates boosted income.
However, Citigroup Inc reported a 21% fall in profits with investment banking taking a hit. Wells Fargo’s reported profit fell 50% as it racked up $3 billion in extra costs including $3.5 billion in fines from regulators).
“We ended the year on a strong note, growing earnings year over year in the fourth quarter in an increasingly slowing economic environment,” Bank of America’s CEO Brian Moynihan said in Friday’s release, describing 2022 as one of the best years for the bank.
Shares were lower in early trading. JPMorgan fell nearly 3%, Wells was down 4%, Bank of America was down 3%, Citi was around flat. But all rebounded during the day to close higher by between 1.7% (Citi) and 3.3% (Well Fargo) by the close.
The four banks set lifted provisions by more than $US4 billion to prepare for impaired loans later in the year: JPM set aside $US1.4 billion, Wells Fargo $US957 million, Bank of America set aside $US1.1 billion and Citi set aside $US640 million.
Morgan Stanley and Goldman Sachs report tomorrow. Goldman Sachs figures will be very weak and will help explain the cost slashing and job losses that started last week.
JPMorgan’s investment banking unit’s poor run continued in the quarter, with revenues down 57% as corporate executives battened down the hatches to prepare for a potential recession instead of spending on deals. Bank of America’s investment banking fees more than halved in the quarter.
JPM’s trading revenue, however, gained from market volatility as investors repositioned for a high interest rate environment.
Household spending supported for much of the pandemic by a strong job market and government stimulus, and while US consumers are generally in good financial shape, they are expected to start to fall behind on payments in coming months if the labour market decays.
“The consumer still remains in pretty good shape,” Bank of America’s Chief Financial Officer Alastair Borthwick said on Friday’s investor briefing.
“There’s a lot of pent-up demand,” especially for travel, he said (as there is in Australia at the moment).
