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Investors look for hints of inflation in earnings in the week ahead

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Traders on the floor of the New York Stock Exchange.

Source: CNBC

Earnings will be the major focus for investors in the week ahead, as they home in on whether rising costs are squeezing margins and signaling a build in inflationary pressures.

From Coca-Cola and IBM to Johnson & Johnson and Netflix, investors will hear from a broad swath of corporate America.

So far, with one week in, companies are beating earnings estimates by a wide margin of more than 84%, according to Refinitiv.

This three-month period is the first to be compared to year earlier profits that were affected by the pandemic. Profit growth for the S&P 500 is a stunning 30.2% for the quarter so far, based on actual reports and estimates.

That makes it the best three-month period since the third quarter of 2010, according to FactSet.

Signs of margin pressures?

Major banks, like JPMorgan Chase, Goldman Sachs and Bank of America reported better than expected profits in the past week.

The S&P 500 ended the week at a record high of 4,185, a gain of 1.4%. The Dow, higher for a fourth week, gained 1.2 to end the week at a record 34,200. Nasdaq gained 1.1% for the week, finishing at 14,052.

Utilities was the best performing major S&P sector, gaining 3.7%, followed by materials, up 3.2% and health care, up 2.9%. Technology was up 1%. Financials were up 0.7%, while industrials were up 0.6%.

Lori Calvasina, head of U.S. equity strategy at RBC, said she is watching the coming week’s earnings for signs of margin pressures from higher commodity prices, supply chain issues and other cost factors.

“Those big forces that are threatening margins right now don’t really apply to financials. They apply more to industrial companies, the material companies and consumer companies,” she said.

“I think [sectors] like the industrials will give you color on margins,” Calvasina added. “Margins really are the big question mark going forward. I’m definitely watching and listening to see what companies are going to say about taxes.”

President Joe Biden has proposed raising corporate taxes to 28% from 21% to help pay for his infrastructure plan.

While the fate of the tax hike is still not clear, the increase in other costs is apparent. Fuel costs have risen sharply with a 30% rise in oil prices since the beginning of the year. Lumber prices in the futures market are at an all-time high and copper futures are up about 17% year-to-date.

Calvasina said companies face a headwind and a tailwind.

“Companies are saying we found new ways to cut costs. When revenues come back, margins are going to explode to the upside,” she said. “Some of the Covid-related costs will come down. Those are some of the positives.”

But not every company will see those benefits. “We could start to see wage pressures come back. Rising commodity costs — increases in PPI and increases in CPI — those are negatives for margins,” Calvasina said, referring to the producer price and consumer price indexes.

Searching for hints of inflation

Economic rebound

In the past week, economic reports underscored how strong the economic momentum could be in the second quarter. Retail sales for March were up nearly 10%, and jobless claims were the lowest of the recovery.

There is little data in the week ahead, aside from PMI manufacturing and services data Friday. But the markets will keep a close eye on unemployment figures after Thursday’s report of 576,000 new claims — the lowest level since the early days of the pandemic.

“The large claims decline suggests that job separation rates may finally be normalizing, a good sign for April payrolls,” note Barclays economists. A surprise 916,000 jobs were added in March, and economists have said they now expect a string of reports showing payrolls are up by 1 million or more.

However, Stephen Stanley, chief economist at Amherst Pierpont, says it may be too early to read too much into the claims data, and the coming week’s report will be important.

He said the drop in claims was driven by sharp drops in a number of states, including more than half in California and even larger percentage declines in Kentucky and Virginia.

 “Unfortunately, I have no confidence that these moves won’t be at least partially reversed next week,” he wrote. “Continuing claims in the special pandemic programs continue to seesaw up and down every week, with the latest reading, for the period ended March 27, being a down week.”

Watching bonds

Stock investors will also be watching the bond market, where yields declined in the past week and then reversed. The 10-year Treasury was at 1.59% Friday, after tumbling sharply on Thursday.

Yields move opposite price, and the 10-year is the most widely watched bond security, as it impacts mortgage rates and other loans.

“The 10-year will now trade in the 1.50% to 1.75% trading range,” said Boockvar.

“It’ll break below that if inflation is transitory and it will break above if it’s proven to be otherwise,” he added. “I think we priced in the last inflation stats and then we’ll take into account what the real world is saying, from companies.”

Week ahead calendar

Monday

Earnings: Coca-Cola, IBM, United Airlines, Zions Bancorp, FNB, Steel Dynamics

Tuesday

Earnings: Johnson & Johnson, Travelers, Procter and Gamble, Netflix, Abbott Labs, CSX, Lockheed Martin, Intuitive Surgical, Tenet Healthcare, Philip Morris, Northern Trust, Fifth Third, KeyCorp, Comerica

Wednesday

Earnings: Verizon, Chipotle, Whirlpool, Nasdaq, Baker Hughes, Anthem, Netgear, Spirit Airlines, Canadian Pacific Railway, Lam Research, Discover Financial, SLM, Halliburton, Knight-Swift Transportation

Thursday

Earnings: AT&T, Intel, D.R. Horton, American Airlines, Union Pacific, Alaska Air, Pentair, Tractor Supply, Celanese, Seagate Technology Biogen, Dow, Credit Suisse, SAP, Boston Beer, Mattel, Snap, Valero Energy, Freeport-McMoRan, Quest Diagnostics

7:45 a.m. European Central Bank rate decision

8:30 a.m. Initial jobless claims

10:00 a.m. Existing home sales

Friday

Earnings: American Express, Honeywell, Daimler, Regions Financial, Schlumberger, Kimberly-Clark

9:45 a.m. Manufacturing PMI

9:45 a.m. Services PMI

11:00 a.m. New home sales

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China autonomous driving firm WeRide valued at $3.3 billion after funding

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Visitors looking at a driverless car with 5G technology by WeRide at a 5G innovation park in Hangzhou in China’s eastern Zhejiang province on Jan. 20, 2019.

Stringer | AFP | Getty Images

GUANGZHOU, China — Autonomous driving company WeRide has raised new funds valuing the company at $3.3 billion dollars.

The Nissan-backed start-up did not disclose the sum raised but said it totaled “hundreds of millions” of dollars from venture capital investors including IDG Capital and Sky9 Capital. A number of other backers and existing investors participated in the round.

Tony Han, CEO of WeRide said in a statement that the new funding would be used for research and development, and commercialization “with the aim of delivering large-scale autonomous mobility in the coming future.”

WeRide is one of the many companies based in China pushing aggressively to take a lead in the autonomous driving space globally.

In 2019, it opened a robotaxi project in the southern Chinese city of Guangzhou, where it is headquartered. Members of the public have been able to use the service since last year in a certain area of the city.

In April, WeRide obtained a permit from the California Department of Motor Vehicles (DMV) to conduct driverless testing on public roads in San Jose.

The company is competing with other start-ups such as Pony.ai, which raised $267 million in November, and AutoX. Larger technology firms including internet giant Baidu and ride-hailing company Didi, are also exploring the space.

WeRide’s latest funding round comes off the back of a $310 million cash injection in January.

WeRide’s CEO previously told CNBC that he predicts the large-scale application of robotaxis will take place between 2023 and 2025. He said that WeRide will begin to make money from the business in 2025. 

The company does not actually manufacture cars. Instead, it sells the autonomous driving systems to other automakers.

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Bitcoin (BTC) price falls after Tesla stops car purchases with crypto

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Artur Widak | NurPhoto | Getty Images

GUANGZHOU, China — Hundreds of billions of dollars were wiped off the entire cryptocurrency market after Tesla CEO Elon Musk tweeted that the electric vehicle maker would suspend car purchases using bitcoin.

At around 6:06 a.m. Singapore time on Thursday when Musk made the announcement, the value of the whole cryptocurrency market stood at around $2.43 trillion, according to data from Coinmarketcap.com.

Around 8:45 a.m., the market capitalization had dropped to around $2.06 trillion, wiping off around $365.85 billion. The market has pared some losses. Since Musk’s tweet, the cryptocurrency market had seen $165.75 billion wiped off its value at around 9:22 a.m. Singapore time.

In February, Tesla announced in a regulatory filing that it had purchased $1.5 billion worth of bitcoin and planned to accept the cryptocurrency for payments.

Musk cited environmental concerns on Thursday and said Tesla is “concerned about rapidly increasing use of fossil fuels for Bitcoin mining and transactions, especially coal, which has the worst emissions of any fuel.”

Bitcoin is not issued by a single entity like a central bank. Instead, it is maintained by a network of so-called “miners.” These miners use purpose-built computers that require a lot of energy to solve complex mathematical puzzles in order for bitcoin transactions to go through. Bitcoin’s energy consumption is larger than some individual countries.

At around 9:34 a.m. Singapore time, bitcoin was down over 12%, dipping below the $50,000 mark for the first time since Apr. 24, according to CoinDesk data. Despite the recent pullback, bitcoin is still up over 400% in the last 12 months.

Other cryptocurrencies ether and XRP were also sharply lower.

Musk has been a big proponent of digital currencies including bitcoin and dogecoin, helping to drive their prices higher in recent months.

The Tesla CEO said the company will not be selling any bitcoin and intends to use it for transactions “as soon as mining transitions to more sustainable energy.”

Bitcoin has garnered interest in the last year as companies such as Square and Tesla announced bitcoin purchases and large institutional investors entered the cryptocurrency space. Major investment banks like Goldman Sachs and Morgan Stanley have also sought ways to allow their wealthy clients to get bitcoin exposure.

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Facebook-backed Diem is moving from Switzerland to the US

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The logo for Diem, formerly known as Libra, is seen is displayed on a smartphone screen with a Facebook logo in the background.

Pavlo Gonchar | SOPA Images | LightRocket via Getty Images

LONDON — Facebook-backed digital currency project Diem said Wednesday it has withdrawn its application for a Swiss payment license and will instead shift its operations to the United States.

The Diem Association, which oversees development of the Diem digital currency, had been pursuing a payment system license with Switzerland’s FINMA watchdog. Diem has now dropped plans to secure Swiss regulatory approval, while its U.S. subsidiary has partnered with Silvergate, a California state-chartered bank, to issue the token.

“While our plans take the project fully within the US regulatory perimeter and no longer require a license from FINMA, the project has benefited greatly from the intensive licensing process in Switzerland and the constructive feedback from FINMA and more than two dozen other regulatory authorities from around the world convened by FINMA to consider the project,” Stuart Levy, Diem’s CEO, said in a statement.

Diem said it plans to move its operational headquarters from Geneva to Washington, D.C., where its U.S. unit is based.

FINMA declined to comment when contacted by CNBC.

Formerly known as Libra, Facebook’s vision for a digital currency was met with a severe backlash from regulators when it was first announced in June 2019, with central bankers and politicians worried it could undermine sovereign currencies like the dollar, enable money laundering and infringe on users’ privacy.

The organization has since lost several key backers — including Visa, Mastercard and PayPal — and suffered a number of notable executive departures.

Diem had initially proposed a universal currency tied to a basket of major currencies and government debt. After much regulatory opposition, the group then switched its focus to multiple “stablecoins” backed one-to-one by different currencies, as well as one multi-currency coin.

For now, Diem is only planning to issue a U.S. dollar-backed stablecoin, called Diem USD. Unlike bitcoin, which uses a public ledger system and isn’t controlled by any single authority, Diem’s technology will be open to only a few participants, such as Facebook and other members of the Diem Association. Stablecoins are also designed to avoid the price volatility seen in cryptocurrencies like bitcoin.

Silvergate will be the exclusive issuer of Diem USD and will manage its dollar currency reserve. Silvergate has become a go-to for cryptocurrency businesses shunned by traditional lenders.

Diem is preparing to launch a pilot with its dollar-pegged stablecoin later this year, a person familiar with the matter told CNBC in April. The pilot will be small in scale, focusing largely on transactions between individual consumers, the person said.

Digital currencies have been the talk of Wall Street lately thanks to a wild rally in bitcoin and other digital currencies. Institutional investors have shown growing interest in bitcoin, while major firms like Tesla and Square have made big bets on the digital coin.

At the same time, central bankers are also grappling with the concept of digital currencies. The People’s Bank of China has been racing ahead with trials of its digital yuan in various cities. And there have been growing calls for the U.S. Federal Reserve to develop a digital version of the dollar.

However, some in the crypto industry think that digital innovation around currencies might be best left to the private sector.

“Governments can help set the rules of the road and make sure monetary policy can be emitted, financial crimes can be thwarted. But the government shouldn’t be in the business of building technologies,” Jeremy Allaire, CEO of crypto firm Circle, told CNBC in an interview last week.

Dante Disparte, Diem’s former public affairs chief, left to join Circle last month. Circle and crypto exchange Coinbase helped launch a stablecoin called USD Coin, which has since seen growing acceptance with Visa now supporting payment settlement with the token. Meanwhile, tether, a controversial stablecoin, is currently worth over $57 billion, according to CoinMarketCap data.

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