Oh Snap

After a bruising few months, the last thing investors in tech stocks wanted to see was an unexpected profit warning. But that’s unfortunately what they got this week, with Snap warning about how a deteriorating macroeconomic environment will cause it to miss its previous earnings guidance. Snap’s share collapsed by a record 43%, and the carnage spread to other social media stocks that are already reeling from slowing user growth and rising interest rates.

Macro

European government bond yields and the euro all rose on Monday after ECB president Christine Lagarde signaled that the central bank is likely to raise interest rates in July. That would be the ECB’s first rate hike in over a decade as officials become increasingly alarmed about record inflation, choosing to focus on the risks of runaway prices over fears about the outbreak of war and renewed supply-chain issues derailing the pandemic rebound.

But with inflation almost four times the ECB’s 2% target and other major central banks already hiking interest rates, many have accused the ECB – whose deposit rate is currently minus 0.5% – of moving too slowly. The deposit rate has been in negative territory since 2014, when the region was facing a sovereign debt crisis. Based on Lagarde’s comments on Monday, the eurozone is expected to exit negative interest rates by the end of September.

Stocks

Pessimistic investors are ditching American stocks on the back of rising interest rates and growing fears of a recession. But corporate insiders are growing increasingly optimistic: more than 1,100 company executives and officers have bought shares of their own firms in May, exceeding the number of sellers for the first time since March 2020. That means corporate insiders, whose purchases correctly signaled the market bottom in 2020, might not be as worried about a recession and are using the S&P 500’s longest stretch of weekly losses in two decades as a buying opportunity.

Video conferencing giant Zoom reported earnings and gave an outlook that were both better-than-expected. The firm said it expects revenue to grow by about 10% this quarter, better than analysts’ estimates, but still its slowest quarterly growth on record. Zoom’s stock was a stay-at-home darling during the pandemic and benefited from five straight quarters of triple-digit revenue growth. But the firm is now reckoning with dramatically slower expansion and a market correction that’s hammered tech stocks the most: its shares are down about 85% from their peak in October 2020, including a drop of more than 50% this year. Still, while stay-at-home stocks fall out of style, Zoom could be better positioned since it’s benefiting from the rise of hybrid work.

In another turnaround of fortunes, Snap – which benefited from a surge in usage of its Snapchat app during the pandemic as people looked for entertainment and connection from their homes – gave an unscheduled profit warning at the start of the week. The firm said that since it issued guidance at its earnings call around a month ago, “the macroeconomic environment has deteriorated further and faster than anticipated”. That’s negatively affecting companies’ digital advertising budgets, forcing digital ad-dependent Snap to cut its revenue and profit forecasts for the current quarter.

Snaps’s shares collapsed by 43% – a record one-day drop for the firm – and the carnage spread to shares of other firms reliant on digital advertising including Facebook-owner Meta, Twitter, Alphabet, and Pinterest. In total, all five firms lost more than $135 billion in market value on Tuesday as a result of Snap’s warning. All these platforms are competing for digital ad dollars at a challenging time with heightened economic uncertainty, and – as one notable chief investment officer put it – are having to bring investors’ unattainable and unrealistic expectations back down to Earth.

Commodities

You’d think that after the recent price spike in energy commodities, things would normalize soon. But the worst may be yet to come, with oil and natural gas demand expected to soar in the coming months at a time when supplies are being disrupted by war and production issues. See, driving season in the Northern Hemisphere takes place in the summer, when demand for gasoline (and therefore oil) is typically at a peak. Summer in much of the Northern Hemisphere is also a typical peak for electricity use due to air conditioning. That means increased demand for natural gas – a major fuel used for electricity generation.

Scientists are already certain 2022 will be among the ten hottest years on record, with summer temperatures expected to be much higher than normal. The problem is that energy supplies are so fragile – especially after Russian supplies got disrupted from war and sanctions – that there just won’t be enough to go around, and power cuts are expected in many countries as a result. The imbalance between supply and demand could also lead to another big jump in energy prices and further complicate central banks’ efforts to tame inflation. See, while higher interest rates help combat inflation by lowering demand, they do very little to tackle inflation caused by soaring energy costs.

Crypto

We need to talk again about how the collapse of TerraUSD and its sister token Luna is impacting the wider crypto market – this time, the DeFi (or decentralized finance) sector. The DeFi market is where investors deposit, borrow, lend, and exchange cryptocurrencies without any financial intermediaries like brokerages, exchanges, or banks.

One key way to assess the health and size of the DeFi market is to look at total value locked (or TVL): the total value of the funds that users have deposited at DeFi projects for things like trading liquidity, lending, and so on. You can think of a project’s TVL like a financial institution’s assets under management: the higher it is, the greater its earnings potential (all else equal). And so for the DeFi sector as a whole, the higher the TVL, the higher the overall sector’s earnings potential. So here’s the thing: the DeFi market’s TVL has almost halved since Terra’s collapse began – not an encouraging sign for the sector…

Next week

The calendar next week is relatively light due to some bank holidays, with the US off on Monday and the UK off on Thursday and Friday. But the first week of June brings the US jobs report on Friday, with investors looking for clues on the health of the labor market. A string of inflation updates will be anticipated from the eurozone and Germany. Nothing major on the earnings calendar, with first-quarter earnings season wrapping up in most markets.