Is a Recession Looming?
Happy Friday everyone. This week, the US and UK central banks have imposed stricter monetary policies in the fight against inflation, and some interesting UK economic performance metrics were released. More updates have emerged in Elon Musk’s twitter funding arrangements and the Markets have taken a turn for the worse. Enjoy.
Fed goes on a hike
On Tuesday, the US Federal Reserve (Fed) raised its benchmark interest rate by 0.5%, the largest rate hike since 2000. This means that commercial banks will now have to borrow at a higher cost, and they will pass this higher cost onto its customers, meaning money will be less attractive to borrow and spending in the US economy may decelerate. It also means that the US Dollar will become a more attractive investment for foreign investors, as they will gain a higher return from saving dollars in a US bank account, rising the exchange rate of the dollar against other currencies (as we have seen lately).
The Fed have made it clear there is a strong chance that more rate hikes will follow in the remaining meetings during 2022, with analysts expecting the rate to rise to a range of 3-3.25% by December. The Fed also gave detail on how they plan to shrink their huge $9tn balance sheet, which grew rapidly over the last 2 years to support a covid-riddled economy. This is another Quantitative Tightening (QT) measure that will filter cash out of the economy and back to the Fed.
Market Tumble
The Tech-Heavy NASDAQ 1000 on Thursday fell a huge 5%, its largest one-day decline since the start of the Covid pandemic in 2020, with the S&P 500 following closely with a 3.5% dip. This comes after the Fed rate hike mentioned above, that resulted in a spike on Wednesday which was quickly corrected on Thursday. Analysts have stated that due to further rate hikes expected throughout the year, economic activity will continue to slow hence investors are selling. It will be interesting to see where these major markets are in a couple of months.
A Year-to-Date view of the NASDAQ, Source: Tradingview
Recession Looming
Similar to the Federal Reserve action this week, the Bank of England’s Monetary Policy Committee (MPC) has raised the cost of borrowing by 0.25 to 1%, the highest it has been in 13 years. The BOE Governor Andrew Bailey warned that there is highly likely to be a recession in the second half of 2022, blaming high energy costs and stating that inflation is expected to hit 10.2% by December, its highest in 40 years. So essentially every £1000 that you had at the start of 2022 will be worth will only be worth £893 by December… which is worrying to say the least. The central bank has made it clear that they will pursue price stability at the expense of poor economic performance in the coming years.
Interest rates on the move,Source: Bank of England
Binance has Elon’s back
Elon Musk has revealed he has acquired another $7bn of equity from big names such as Binance, Sequoia Capital and Larry Ellison. This means Musk’s margin loan position will be cut in half to $6.25bn and his equity side of the deal now sits at $27.5bn. There is also $375mn of funding coming from Qatar’s Sovereign Wealth Fund, the first government to be involved. The deal will turn Musk into one of the worlds social media barons, and he will have complete power over how millions of people receive daily news and information.
Healthy Quarter for Crocs
On Wednesday Crocs Inc (NASDAQ: CROX) issued its quarterly report, with some very promising results. The well-known foam clog manufacturer based in Colorado USA has reported a 44% annual growth in revenue for Q1 to $660m, with an outlook of sales in the region of $3.5bn for the whole of 2022. About 34.6% of Crocs sales came from selling directly to customers, with the other 65.4% sold through wholesalers. Even with rising costs such as air freight and energy, Crocs still look on track to have a great performance this year.
Crocs, Inc. was recently introduced into the spark portfolio by Peter and it currently holds a weight of 2%. This investment looks extremely promising given the companies shift online, with Crocs digital sales growing 20.3% last quarter alone, not to mention the recently acquired HEYDUDE brand that reported sales of $115m during Q1. This is all great news for The Spark’s portfolio, constructed by Peter. Find his articles here.
I hope you enjoyed this weeks article!
See you next week,
Patrick
Disclaimer
This communication is for informational and educational purposes only and should not be taken nor used as investment advice, as a personal recommendation, or solicitation to buy or sell any financial instrument. This material has been prepared without considering any particular recipient’s investment objectives or financial situation and has not been prepared in accordance with the legal and regulatory requirements to promote independent research. Any references to past or future performance of a financial instrument, index or structured product are not, and should not be taken as, a reliable indicator of future performance. I assume no liability as to the accuracy or completeness of the content of this publication.