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Sterling slides as rate hike bets get reduced, FTSE 100 outperforms

European markets initially started the day on the back foot after another set of poor trade numbers from China in August. We did see an improvement from July with declines in imports of -8.8% and a -7.3% decline in exports. 

Europe

While better than the consensus view, the numbers still pointed to weak demand from a domestic as well as international standpoint, which may well explain why basic resources is acting as a drag, along with real estate which is underperforming, after data showing UK house prices saw their biggest percentage decline in over a decade, as high interest rates continue to bite.

We’ve started to see a modest rebound off the lows, in what has been another choppy session, largely due to the weakness of the pound which slipped below the 1.2500 level for the first time since early June, as the FTSE 100 looks to carve out a gain for the first time in a week.

Economic data elsewhere in Europe is also contributing to the overall uncertainty, after EU Q2 GDP was revised sharply lower from 0.3% to 0.1%, meaning that the EU economy has seen little to zero growth over the course of the past nine months.

Melrose Industries is the best performer after reporting an upbeat set of H1 results, upgrading its full year guidance on the back of an improvement in its aerospace division, which it says is expected to see an improvement in operating profits of 8% to between £375m and £385m, helping to give a lift to sector peer Rolls-Royce in the process.

Beazley is the worst performer after reporting a modest improvement on H1 profit of $366.4m, despite a solid increase in premiums from $2.57bn to $2.92bn. Return on equity fell from 26% to 18%, with the insurer reporting no change to its full year guidance.

On a more positive note, Direct Line is seeing solid gains after reporting a 9.8% rise in H1 premiums and fees to £1.6bn, despite reporting a loss of £4.6m. The insurer also announced the sale of its commercial insurance business which should help to improve its solvency ratio. On a longer-term basis management expects margins on the motor business to improve which should in term enable a return to profitability into 2024.

US

US markets opened sharply lower after weekly jobless claims dropped to 216k and gave an added nudge higher to the US dollar as traders continued to price in a more resilient US economy and the prospect of one more Fed rate hike before the end of the year.

The Nasdaq 100 is leading the weakness driven lower by tech largely due to further weakness in the Apple share price, after China said it was looking to ban the use of iPhones in sensitive areas of state companies and government agencies. Chipmakers are also lower with Nvidia and AMD also lower with the Nasdaq 100 looking set to post its fourth daily decline in a row.

GameStop shares saw an initial pop higher after reporting a 2.4% rise in Q2 net sales of $1.16bn, while reporting a lower-than-expected loss of 3c a share. These gains proved somewhat short-lived given that the improvement was largely driven by a $1.5m inflow due to the sales of some digital assets.

FX

It’s been a mixed bag of a day for the US dollar falling against the Japanese yen as traders continue to pare long US dollar positions as we head towards the end of the week, and concern about possible intervention in the coming days from the Bank of Japan.  

The pound has continued to slide today as traders pare bets on the Bank of England hiking rates by as much as expected over the coming weeks and months. Judging by recent comments from the likes Governor Bailey, as well as deputy governor Broadbent and chief economist Huw Pill, there is a sense the market is being softened up for a rate pause later this month, with the narrative likely to be that rates are likely to stay at current levels until 2025 at the very least. This in turn has seen gilt yields slide across the board, as future rate hike bets get priced out, and investors turn their attention to which central bank might have to cut rates first, with opinion split between the ECB or the Bank of England.

The euro has come under pressure, dipping below 1.0700 on the back of this morning’s weaker than expected German industrial production numbers, and the downgrade to EU Q2 GDP, raising the prospect that the ECB will probably hold back from raising rates next week, while signalling an end to the current rate hiking cycle.

ECB officials can talk a good game when it comes to raising rates again, but when you haven’t seen any growth to speak of across the region since Q3 last year and the current economic data is so bad, why would any self-respecting central bank/banker look to compound that pain with more rate hikes.

Commodities

Crude oil prices appear to have topped out for the time being as concerns over weak economic activity bump against the prospect of tighter output restrictions.  

Despite today’s weakness in yields, gold prices have struggled for gains, with the relative strength of the US dollar making it a more attractive bet than the yellow metal. With markets still weighing the prospect of one more rate hike by year end it's hard to make the case for a return to the highs this month, let alone the $2,000 level.  

Volatility.   

Inflation worries hit the luxury goods sector on Wednesday, with Louis Vuitton Moet Hennessy stock finding itself back in focus. The company has recently lost its title as Europe’s most valuable company and management comments over the impact of rising costs on demand extended recent losses. One day vol printed 53.26%, compared to 33.56% for the month.

The impact here was also felt across the wider luxury goods industry too, with CMC’s proprietary basket covering the sector seeing moderately elevated levels of price action. The underlying value of the basket headed towards lows not seen in almost six months on Wednesday, with one day vol of 27.24% against 22.93% for the month.

At that sector level however it’s Cannabis that continues to dominate. There were some signs of profit taking in play on Wednesday, reigning in the close on 50% gains posted for the basket of licensed marijuana growers over the last week and a half, but upward momentum remains intact. The underlying is trading at three and a half month highs with one day vol of 153.16% against 112.37% for the month.

In commodities, Sugar prices remain in focus. Whilst supply concerns persist, recent gains for the US Dollar have been exerting some limited downside force on the price. One day vol stands at 49.29% against 43.17% for the month.

And keeping with commodities, gasoline is also seeing elevated levels of price action. After that abortive move higher on Tuesday, upside pressures are building once again. Sentiment here was reinforced by reports of bigger than expected draws on both gasoline and crude oil last night. One day vol printed 37.44% against 32.16% for the month.


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