Major indices were mostly lower this week. The S&P 500 managed to pare its losses for the week to finish the week flat, while the tech-heavy Nasdaq and the small-cap Russell 2000 lead the losers.
This week was filled with wild swings, as everything from “stablecoins” to trillion-dollar companies felt the heat of an uncertain market.
Inflation
Inflation was at the root of this week’s volatility.
The Consumer Price Index released Wednesday left investors wishing for more as price increases moderated on a yearly basis (down to 8.3% from 8.5%), but still rose faster than expected in April (0.3% vs expectations for 0.2%).
This left a bittersweet taste for investors as, on the one hand, it could signal that “peak inflation” has passed, but on the other, a larger-than-expected rise could indicate that persistently high inflation will stick around longer than expected.
Producer Prices met monthly expectations for a rise of 0.5% and showed moderation on a yearly basis as well, as prices rose 11% year-over-year against expectations for a yearly pace of 11.5%.
Terra-ble
Algorithmic stablecoin TerraUST - and its partner-in-fail TerraLUNA - crashed this week, forcing the crypto to halt its blockchain.
TerraUST is a coin that is intended to always be equal to $1 worth of TerraLUNA. To do so, Terra’s algorithm is constantly adding and destroying LUNA in order to rebalance UST at a dollar’s worth of LUNA.
To do so, Terra relies on arbitrage traders to come in and trade some UST for LUNA. This actually devalues LUNA, since it adds to the circulation of LUNA, meaning that the arbitrage traders must always believe the price will rise (or at least remain steady) in the future so they can profit from the price divergence.
Over the weekend, UST showed its first warning signs as it diverged from the dollar peg. This spurred a selloff in LUNA as investors didn’t want to get stuck holding a coin that potentially would become increasingly devalued as more and more LUNA gets minted in an attempt to rebalance UST at $1.
Before being halted, TerraUST fell from its dollar peg to $0.18 and TerrraLUNA fell from a 5-day high of $77.49 to $0.0001345…
The Terra foundation floated a restart plan late Friday.
Earnings
Earnings dominated the individual stock news this week.
Earnings were all over the place this, both in the results and the companies reporting.
Disney (DIS) underwhelmed investors, missing earnings and revenue estimates. Disney+ added more subscribers than expected and outlined plans to bring in more through the addition of an ad-supported version of the streaming service.
While the company reassured that it is on track to hit the goal of 230-260 million subscribers by 2024, the company said it intends to focus heavily on international growth to bolster that, which could weigh on margins.
Meanwhile, Coinbase (COIN) fell hard after heightened volatility in crypto markets weighed on its earnings report. An important note about COIN’s revenue structure is that it makes more money on buy-orders than sells, causing the company to make less in down markets.
Lastly, Affirm (AFRM) had a much better-than-expected report on Friday, beating earnings and revenue estimates. The company managed to reassure investors after fellow-fintech company Upstart (UPST) - which also relies on capital markets for loans - guided revenue guidance for the second quarter and full-year 2022 lower.
Affirm further reassured investors that it can adapt to changing consumer trends after loans for Travel and Ticketing showed strong growth of 122% from the third quarter of 2021 and 50% growth on a sequential basis.
All told, the S&P 500 remained flat this week. The Dow fell 2.14%, while the Nasdaq dropped 2.8% and the Russell 2000 declined 2.58%.
