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Facebook is like the shopping mall: it used to be where all the young, hip kids would hang out for hours on end; now it’s just a place for old people and occasional cranks to get annoyed. I read something like that on Twitter…it’s kind of mean but kind of true. Facebook is falling behind and its main consumers are spending more and more time on TikTok. Some $200bn, or about a quarter of its market capitalization, was wiped off the value of Facebook’s owner Meta (FB) last night as the company delivered a stinging earnings miss and said its user base declined for the first time. Huge penny-stock move for one the biggest companies on the planet. Highlights the risk of being too concentrated…ignoring the obvious it is supportive of the rotation narrative.

Facebook’s big problem is competition for attention – there are only so many people and so many hours in a day and we’re already close to saturation point. Any next big thing diminishes FB. And Apple’s privacy changes are making monetizing those declining users harder since it cannot target advertising so well. Facebook’s daily active users fell for the first time on record. EPS came in at $3.67 vs $3.84 expected, whilst revenues were a little higher than forecast. Weak guidance was killer as it warned of numerous challenges ahead. The metaverse feels a long way away.

Spotify (SPOT) also warned of slowing subscriber growth ahead with its earnings update last night. It’s too early to tell what the Joe Rogan backlash had meant for the company, CEO Daniel Ek said. Shares plunged over 20% before paring losses to trade down 10% in the after-hours market.

So, on the one hand you have quality names like MSFT, AAPL, GOOGL delivering quality numbers. On the other hand you have arguably more speculative bits (NFLX, SPOT), and arguably more outdated corners of the tech space (FB, PYPL) doing a lot of damage. Question is whether these numbers from Meta spark a renewed drawdown for tech stocks. Watch also the clear read across we have seen in the after-hours market on the likes of Twitter, Pinterest and Snap. A stock picker’s market you could say…which horses do you tie yourself to? Because tying to all of them risks taking a huge hit when you see earnings being sold like that. And on that note the reaction seems way overdone.

Nevertheless, stock markets on Wall Street were broadly higher on Wednesday, extending the win streak for a fourth straight session. Stocks up because of a terrible jobs report…bad news is good news again as it means fewer rate hikes expected. The US ADP employment print came in at -301k (forecast +184.3k, previous +807k), which amounts to a huge miss that signals a weak NFP report (Harker already called it) and is a stagflation reading by any measure. Does that kill the 50bps rate hike chatter? Point is the Fed is fighting inflation not maximising employment – it’s in a different mode in 2022 from 2021 and soft jobs numbers are now seen as sign of tight market.

Alphabet did a huge chunk of the lifting, rising 7.5% after the earnings beat. Meta though will have an effect – NQ futs dumped about 300pts after the bell…holding around 14,800 level for now, with the NDX cash market having closed up 0.8% at 15,140 on Wednesday – called to open around 14,850. We talked about how Microsoft, Apple and then Alphabet were offering a steadying hand on the tiller after the emotional rollercoaster of January; well we’re back in Netflix earnings territory again (which was -20% after hours).

In Europe this morning, shares are looking broadly steady ahead of the European Central Bank (ECB) and Bank of England (BoE) meetings. The FTSE 100 was helped by a strong performance at Shell, which reported a strong rise in profits, more buybacks worth $8.5bn and plans to raise the dividend by 4%. Oil & Gas lifted stocks in London to a mild gain of about 0.2%, whilst the European bourses were hovering around the flatline.

BoE + ECB soup

Eurozone inflation hit record 5.1%, accelerating month-on-month, which is a worry for the ECB today. Italian inflation also hit a 26 year high at 4.8%. Some respite from the German producer inflation figs in Tuesday’s PMI, but the ECB is starting to look well behind the curve – markets already suggesting it hikes at least twice this year.
Nordea: “Headline inflation at 5.1% and core inflation at 2.3% were clearly higher than expected, again. Although energy still dominates the headline numbers, wider price pressures are accumulating.”

In short, the market is looking at global bond yields and at EZ inflation and leaning hawkish, but does Lagarde cave? Key questions will be about the thinking (fuzzy) on inflation and any adjustments to the QE programme…no change to policy is anticipated. My bet is she pushes back against notion of rate hikes in 2022 and whilst still acknowledging the inflation risk, stresses that core will ease this year. Is the ECB spooked enough by inflation to move? I doubt it.

BoE meeting ahead looking rather more interesting: with inflation at a 30-year high and the negative economic impact from Omicron far less than feared, the BoE is set to raise rates for a second meeting in a row. Not quite a done deal but close to a slam dunk given the outlook. There are plenty of signs of inflation pressures persisting and broadening; a cost of living crisis is already here. But it’s not a zero sum game: raising rates will hit people on floating rate mortgages, for instance. Increasing the cost of borrowing at this moment carries some risks but ultimately it’s the right thing to do – in fact they should have done it much sooner last year.

The BoE is likely to commence quantitative tightening by not reinvesting the proceeds of bond purchases, not likely to start selling down balance sheet until later this year.
Markets pricing in for 5 rate hikes…which is pretty hawkish so risks open for a dovish surprise. If it sticks to its view that “some modest tightening of monetary policy … is likely to be necessary”, the market probably takes this as dovish. Does the BoE think it needs to go above neutral to tame inflation?

MPC members have been pretty quiet this year – perhaps they have learnt their lesson from all the miscommunication last autumn.

Oil top?

As expected, OPEC+ agreed to increase oil output by 400,000 BPD from March, although it seems they are going to struggle to match even that modest paper increase…tighter market conditions prevail.

EIA inventories showed a decline of more than 1m barrels, though gasoline built by more than 2m barrels. Getting closer to the bearish MACD crossover that bears are looking for to confirm the near-term top for oil.

Oil Chart 03.02.2022

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