Market Watch: US regional bank woes continue


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Team Asset Management offer their weekly round-up of global markets

The stresses in US regional banks undermined sentiment last week, overshadowing better than expected corporate earnings. In the week after JPMorgan bought First Republic out of receivership, the US regional bank index fell another 15%, reflecting concerns that customers will continue to withdraw deposits and/or demand much higher rates to stay put.

Apple headlined the winners on the back of quarterly earnings reports. Its shares rose 5% on Friday, extending their year-to-date gains to 33%, after the company reported iPhone sales increased 2% to $51.3 billion from December to March. Revenue from iPhone sales is a key metric, representing just over half of Apple’s total revenue, and helped to offset declines in sales of Mac computers and iPads.

While overall sales fell in some of its key markets, including the US (-8%) and China (-3%), Apple has sought to expand its footprint in other markets, including India where it opened its first two stores earlier in the year. Apple increased its market share of new smartphones in the country to 5% last year and accounted for 11% of refurbished phone sales.

Airlines also had a good week, including International Consolidated Airline Group (IAG). The owner of British Airways, as well as Spanish flag carrier Iberia and the budget airline Vueling, made an operating profit of €9 million in the first quarter of the year and, more importantly, upgraded its full-year profit expectations, predicting a boom in summer bookings. The group expects capacity will be at around 97% of pre-pandemic levels, although it will be slightly lower at British Airways (92%) as some of its Asian routes have not yet been re-established.

Adidas was one of the biggest movers and its shares rose more than 8% on Friday after it revealed it made an operating profit of €60 million in the first quarter, well ahead of consensus analyst forecasts of just €15 million. The German sportswear manufacturer has endured a difficult year, in large part due to its relationship with Kanye West, but its new chief executive Bjorn Gulden, hired from rival Puma in January, was optimistic it has turned a corner. Although Gulden admitted the company hasn’t decided what to do with its unsold Yeezy brand inventory, he pointed out improved performance in China and increased sales of other shoes, including Gazelle and Samba, can help offset the lost revenue.

Not all companies fared so well after reporting earnings and some notable losers included Starbucks and Estée Lauder. Shares in the coffee chain slumped 9% on Wednesday despite reporting net income rose to $908 million, 36% ahead of the same period last year.

Operating margins also increased to 15.2% from 12.4% after it raised its prices and it opened 464 new stores, bringing total locations to 36,634 globally. However, investors reacted negatively to new chief executive Laxman Narasimhan offering more cautious forward earnings guidance due to ‘economic uncertainties’ around the world and was non-committal over longer-term targets.

Shares in Estée Lauder (-18%) suffered an even sharper fall on Wednesday after it cut is sales forecast for a third straight quarter due to a weaker than expected recovery in Asia, especially in China and South Korea. Overall sales at the luxury cosmetics brand fell 12% to $3.7 billion during the quarter and it warned sales for the year are expected to fall by a similar amount. At the end of last year, Estée Lauder agreed to buy luxury fashion brand Tom Ford for $2.8 billion.

Away from company earnings, both the Federal Reserve and European Central Bank raised interest rates by another 0.25%. However, their messaging was very different. The Federal Reserve hinted that they will likely pause and instead be guided by the economic data, perhaps reflecting concerns over tighter credit conditions stemming from the turmoil in the regional banking sector. Money market futures are pricing in more than a pause and expect the Federal Reserve to pivot sharply and start cutting interest rates starting in July or September.

European Central Bank president Christine Lagarde was much more assertive and warned the bank still has ‘more ground to cover’ to get inflation under control. Inflation in the Eurozone unexpectedly ticked back up to 7% in April and remains far above the ECB’s 2% inflation target.

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