Meta wreckage, Shell beats, ECB up ahead

Tech wreck

The tech-heavy Nasdaq plunged 2% as nasty earnings surprises from big tech stocks left the index bruised and battered. Alphabet fell over 9% and Microsoft was down 7.7% after earnings that read across the market. Meta earnings only make matters worse for tech. The Facebook owner saw a continuation of the weak advertising demand environment experienced throughout the second quarter and faces many other challenges. Alphabet was the tell after it posted horrible YouTube numbers but Meta was worse. Earnings aplenty from the US today – Caterpillar, Mastercard, Merck, Shopify, Amazon, Apple, Intel and Pinterest among others. 

Meta plunges

Meta saw revenues decline 4% and net income down 52% $4.4bn as it felt the industry-wide hit to advertising spending. Revenues would have been higher had it not been for the stronger dollar disrupting the value of foreign currency in which a large portion of FB’s earnings are made. But Meta also faces stiff competition from the likes of TikTok, Snap, etc who are eating its lunch among younger consumers. And it’s ploughing vast sums of cash into its bet on the Metaverse. And it will burn even more going forward, noting that Reality Labs operating losses in 2023 will grow significantly year-over-year. And it’s not just the $10bn cash burn on the Metaverse each year – overall expenses are soaring and seem to be getting out of control, with 2023 expenditure seen rising from around $86bn this year to between $96bn and $101bn. Notably management say this is mainly going to be down higher cost of revenue – working harder for ad dollars, stiffer competition – and headcount will be flat. Until it either wins the Metaverse bet and starts to see some breakthrough returns from this project, or it seriously gets a grip on expenditures, investors would be forgiven for giving FB a wide berth. Shares were down 6% in normal trading yesterday and plunged 19% in the after-hours market to $103…levels last seen in 2016.

Unilever hikes prices

Unilever is the economy in microcosm – prices hiked, sales volumes down. Price growth rose to 12.5% in the quarter, with volumes down 1.6%, leaving underlying sales growth of 10.6%. Brand pricing power is proving to be an advantage, as is scale. The company raised its guidance and expects underlying sales growth for the full year 2022 to be above 8%, with more negative underlying volume growth than in the first nine months as it targets higher margins. Cost pressures to remain elevated in 2023 with higher raw material costs and currency devaluation, as well as higher supplier processing costs from energy and labour inflation. Shares flat. 

Shell profits double

Shell shares popped 4% as it delivered another round of very strong profits, raised the dividend by 15% and announced a further $4bn in share buybacks. Profits doubled to $9.5bn. Shell is delivering stunning results this year, but the question is one of sustainability and tax. How long can it keep up this kind of performance? Probably longer than people realise chiefly as oil prices are likely to remain elevated for a prolonged time. Two, these are the kind of numbers that put a target on your back for politicians looking to fill a black hole in public finances. Politically it’s expedient - will Sunak see another windfall tax as the answer to win back Red Wall voters struggling with the cost of living? 

ECB set to hike

EURUSD will be in focus as the European Central Bank hikes rates again. ECB officials have been warning of self-reinforcing inflation dynamics of late as headline CPI for the Euro area races above 10%. The ECB has raised rates twice in recent months from –0.5% to 0.75% and most think it will deliver a second 75bps hike this week. “We will do what we have to do, which is to continue hiking interest rates in the next several meetings,” ECB chief Christine Lagarde said recently. Finnish central bank chief Olli Rehn echoed this: “There’s a stronger case for front-loading and determined action.” Minutes from the September meeting point to growing consensus that the central bank needs to take decisive action to pushing rates to at least neutral, which is estimated at slight above the 1-2% range. This suggests a very strong chance the Governing Council agree on raising rates by 75bps to 1.5%, with another hike later in the year of 50bps and then a final hike in February. With a 75bps seemingly certain, the questions around this meeting relate to quantitative tightening, mopping up excess liquidity and the terminal rate.