Market commentary: Major indices slides amid global economy concerns

Thursday was not a very good day for Asia and Europe with most major indices falling on the back of renewed worried about the global economy. The Federal Reserve seemed to remain mostly on track in terms of interest rate hikes this year, dashing some hope that it might take a step back. 

Some dismal corporate earnings and statements added to the already uneasy feeling and the markets took a turn for the worst. The adoption of negative interest rates by the Bank of Japan saw a significant reversal of fortunes in this morning’s Asian session though, with major bourses posting gains in excess of 2%.

Samsung, the world’s biggest electronics company by revenue, saw its shares fall by 2.5% after said full-year net profits fell 19% to €14.5 billion. The company warned of slowing demand and economic turbulence after its quarterly earnings missed analyst estimates, joining Apple in a gloomy 2016 forecast in the technology sector. The Korean conglomerate, whose quarterly profit fell short of expectations by almost 4%, said the deteriorating global economy was eroding demand for computers and smartphones and depressing component prices.

Along the same lines, Qualcomm, the biggest maker of processors and modem chips used in mobile phones, also reported a negative quarter, with earning down by 24% although the company insisted that was better than they had expected. Qualcomm shares sold off by more than 7% on the news.

After some dismal earnings by tech companies Microsoft reported fiscal second-quarter results which comfortably beat analyst expectations across the board. Shares in the computing giant settled at around 4% higher in afterhours trading.

As with other recent quarters, investors are expected to key into Microsoft's cloud business, which many believe represents a crucial component for its future growth. The computing giant has been transitioning from a primarily PC-based company into a cloud-focused one, as underscored by new CEO Satya Nadella who said, "Businesses everywhere are using the Microsoft Cloud as their digital platform to drive their ambitious transformation agendas".

Facebook shares soared 13%, dazzling investors as it topped $1 billion in quarterly profit for the first time. Fourth-quarter revenue shot up 52%, driven largely by mobile ads, the company said late on Wednesday. Mobile now makes up a massive 80% of Facebook’s advertising revenue, and mobile-only users now number 827 million, up an incredible 13.2% from 723 million last quarter. That’s a testament to Facebook growth in the developing world that largely skipped the full-sized computer age.

Chinese e-commerce giant Alibaba posted stronger-than-expected earnings in its fiscal third quarter. The company said its quarterly net profit more than doubled to almost €1.8 billion. Strong user activity on mobile, and the record-setting Singles Day shopping event in November, boosted the company's performance and contributed to a 32% increase in revenues. The event was a smash hit, scoring $5 billion in sales within the first 90 minutes that specials went live. It was bigger than any Black Friday or Cyber Monday ever. Alibaba also amassed over 400 million annual active buyers for the first time ever.

Amazon did not perform as well - shares plunged after the Internet retail giant posted quarterly earnings that fell short of expectations, even as its key cloud computing business continued to grow rapidly. The company reported EPS of $1 as opposed to analyst expectations of $1.56, and revenue was also slightly off. Shares in Amazon fell by as much as 15% in choppy after-hours trading.

Fed Recap

In the US all eyes were on the Federal Reserve and with good reason. The current financial market turbulence led many to believe that the Fed would re-asses its outlook and baseline scenario for future interest rate hikes.

Indeed, Fed officials expressed renewed worry about recent market volatility and slow economic growth abroad, sowing some doubts whether the central bank will act again as early as March. Other major central banks have already signaled that (yet) another round of easing may be on the way – Japan surprised early this morning by adopting negative interest rates in an effort to counter the current slowdown and boost lending, consumption and inflation.

Perhaps the strongest clue that the Fed may also be reconsidering somewhat its position is the notable absence of an assessment of risks to the economic outlook. This is a departure from the usual forward guidance whereby the Fed categorizes risks to the outlook as balanced or tilted towards economic strength or weakness.

Similarly, Fed policymakers did not give updated forecasts on the path of monetary policy but said they expected the labour market, one of the most-closely watched indicators, would continue to strengthen and the economy would expand even with "gradual adjustments in the stance of monetary policy." The Fed also dismissed the plunge in energy prices, and the possible impact on inflation, as temporary.

Overall this can be interpreted as the Fed buying itself some breathing space – indeed current pricing suggests a 25% chance of a rate increase in March and markets consequently did not move by much. Stocks were comforted by the fact that the Fed may not be as aggressive in hiking rates, but fearful about the possible economic slowdown.

This article was issued by Andrew Martinelli, Trader at Calamatta Cuschieri. For more information visit, www.cc.com.mt. The information, view and opinions provided in this article is being provided solely for educational and informational purposes and should not be construed as investment advice, advice concerning particular investments or investment decisions, or tax or legal advice. Calamatta Cuschieri & Co. Ltd has not verified and consequently neither warrants the accuracy nor the veracity of any information, views or opinions appearing on this website.