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DAX surges to an 11-month high, and yields slide on belief that rate hikes are near an end

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European markets have moved strongly higher after the Bank of England and European Central Bank both raised rates by 50bps which was in line with expectations, with the DAX moving to a new 11-month high, while the FTSE250 has outperformed the FTSE100, moving to its highest levels since June last year.

Europe

While the tone of both press conferences would appear to suggest that both central banks have further to go in raising rates, markets appear to be taking the view that we’re near a peak as far as rates are concerned, and even if they aren’t done yet, they are close, sending bond yields falling sharply across the board.

There are certainly a lot of assumptions in what has transpired this afternoon, but today’s market price action tells a different story to what we’ve heard from all three central banks in the last few hours. While central banks are essentially saying we have further to go on raising rates, markets are saying we don’t believe you, and even if you do hike again, you’ll have to cut again by year end.    

JD Sports has surged to the top of the FTSE100 after outlining its 5-year growth plan at a capital markets event today. Its targets include capex of £500m to £600m a year to spend on new outlets to grow market share by double digits in key regions.

BT Groupshares have undergone a choppy session, reversing early losses, after reporting Q3 numbers that met expectations. Adjusted revenue came in slightly below expectations at £5.21bn, a decline of 2.9%, although adjusted EBITDA increased in line with expectations to £2.01bn. On a 9-month basis profits after tax came in at £1.32bn, on revenues of £15.59bn, with adjusted EBITDA rising 3% to £5.88bn. BT reaffirmed its full year guidance.  

Shell’s share price has underperformed relative to the wider market despite reporting its best annual profit.

Having been given a heads-up earlier this year that profits in its gas trading business were likely to be better than Q3 it is no surprise that today’s Shell Q4 numbers have beaten expectations, with adjusted profit coming in at $9.81bn, despite lower gas and oil prices over the course of the quarter.

This helped to push annual profits up to a record $39.87bn, over double the numbers returned in 2021, and comfortably beating the previous record set in 2008 of $28.4bn.  

Shareholders will benefit from another $4bn of buybacks while the dividend is increased as expected.

Housebuilders led by Taylor Wimpey and Persimmon have had a good day on the back of a sharp slide in UK gilt yields, which could translate into lower rates for fixed rate mortgages. We’ve seen the 5-year gilt yield fall over 20bps today, below 3%, and its lowest level since early September last year.  

Airlines are also having a strong day after Wizz Air posted its latest traffic numbers for January, which showed a rise of 73% from last year to 4.1m passengers at a load factor of 86%. This has translated into decent gains for easyJet as well as TUI.  

Deutsche Bank shares have slipped back from last week’s 11-month highs, despite recording the best annual profit since 2007. Nonetheless investors were hoping for better as Q4 pre-tax profits came in at €775m, well below expectations of €1.25bn. Net revenue was also lower than expected at €6.32bn. For 2023 Deutsche says it expects to see revenues of between €28bn and €29bn and reconfirmed the 2025 targets the bank set out in March last year.  

US

US markets have picked up where they left off yesterday, opening sharply higher after both the ECB and Bank of England hiked by 50bps but also signalled that they might be close to the end of their rate hiking cycles, even as they insisted, they had further to go. The big cap Dow has lagged with health care acting as a drag, while the Nasdaq 100 has continued to advance as it looks to close in on its September highs.   

Meta shares surged over 20% after beating on Q4 revenues, which came in at $32.17bn, and profits came in at $1.76c a share, as well as announcing a $40bn share buyback. Meta also said it expects to see Q1 revenues come in between $26bn to $28.5bn, which was in line with expectations, as the company saw active daily users rise to 2bn a day, also beating expectations. The Reality Labs business continues to haemorrhage cash to the tune of a -$4.28bn operating loss in Q4, above expectations of a -$3.99bn loss, although revenues did increase, coming in at $727m.

After the bell we’ll be hearing from the three A’s, Alphabet, Amazon and Apple, with cloud revenue likely to be a key focus for Alphabet and Amazon in their Q4, given the recent numbers from Microsoft and the strong performance in that sector.

As for Apple, much attention will be on what effect the China shutdowns had on hardware sales, and particularly the iPhone, in what tends to be their strongest quarter in the leadup to Christmas. Last year we saw Q1 record almost $124bn in revenue, a number that will be hard to get even close to.   

FX

It’s been a choppy day on the currency markets in the aftermath of three central bank rate decisions which have seen the respective currencies weaken in the aftermath of the respective moves.

The pound found itself in the cross hairs today, sliding sharply after the Bank of England raised interest rates by 50bps to 4%, on a 7-2 vote split, with Tenreyro and Dhingra once again voting for no change. The tone of the statement was less pessimistic than November with the central bank upgrading its GDP forecasts for 2023 to -0.5% and to -0.25% in 2024. The central bank maintained its belief that inflation had peaked but said that risks were significantly skewed to the upside and were prepared to act if that proved to be the case.

That said the removal of “forcefully” from the statement spoke to a belief that markets believe that the Bank of England may well be done when it comes to rate hikes, or be very close to it, at the very least. UK gilt yields have plunged with the 5-year yield falling to its lowest level since last September, below 3%.     

The euro initially pushed above the 1.1000 level in early trade but has slipped back sharply in the aftermath of the ECB decision to raise interest rates by 50bps, as well as a pre-commitment to hike by another 50bps in March, before taking a pause to re-evaluate. The commitment to hike again in March comes across as odd, especially if there is concern about sticky core inflation, rather begging the question, why wait if you’re concerned that inflation is becoming stickier than it should be?

This prompted the euro to slip back and for bond yields to slide as well, with the German 2-year yield slipping sharply. The lack of hawkish guidance beyond March appears to have prompted the euro to pull back from its intraday highs.

The US dollar has had a mixed day in the aftermath of last night’s Fed decision, losing the most ground against the Japanese yen, as bond yields in the US continue to come under pressure, with the US 2-year yield slipping to a 6-month low.  

Commodities

Gold prices have made a new 10-month high today. although the gains have continued to be incremental, despite another day of plunging bond yields and US dollar weakness. While above the lows this week at $1,900, the bias remains for a return to the $2,000 an ounce level.

Despite rising optimism in equity markets that central banks are coming to the end of their rate hiking cycles, oil prices seem a lot less sure, with Brent crude prices on course to decline for the 5th day in a row, to a 3-week low, despite a looming ban on Russian crude oil which is due to take effect this weekend. This would suggest that oil traders are less confident about a sharp rebound in Chinese demand than was perhaps the case a couple of weeks ago.

Volatility

Stocks on Wall Street enjoyed an upbeat session on Wednesday, driven by a combination of earnings news and taking a glass half full view of the FOMC policy statement. Tesla was very much part of the upswing here, with the underlying having added more than 6% by the end of after-hours trading, driving one day vol to 133.41% against a one-month figure of 108.36%.

Social media stocks had an active day, gapping lower at the open before staging a full recovery. That played out in CMC’s proprietary basket of shares covering the sector, which traded in a range of almost 5%. In the wake of Facebook’s earnings update after the market close – and the subsequent investor reaction - this is likely to remain an active trade. One day vol on the social media basket printed 80.89% against 53.28% for the month.

The tech-heavy NASDAQ also added 2% as the market priced in Jerome Powell’s comments yesterday. There’s a distinct feeling that the downside projected by the Fed isn’t resonating with too many investors in the underlying market, with the index finding its way back to levels not seen since September. One day volatility sat at 33.87% against 24.55% on the month.

USD/CAD was the most active of currency crosses on Wednesday, advancing ahead of the Fed statement before initiating something of a reversal, again reflecting support for the idea that a lower interest rate environment lies ahead. One day vol sat at 10.32%, up from 8.4% on the month..


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