After a pretty poor couple of days, European markets have seen a decent rebound today, with the FTSE100 looking set to post its first positive week since after three weeks of declines.
The DAX also looks set to reverse a series of three weekly declines. This week’s recovery off the lows has been helped in some part by a sharp slide in bond yields, which has offered some respite to more defensive areas of the market, although it has lagged behind the likes of the CAC40 and FTSE100 today.
Nonetheless it has become much more apparent this week that recession fears are rising, and that’s helping to act as a drag on yields, as markets price in the prospect that an economic slowdown might prevent rates going up as much as originally thought.
We also got an additional lift during the afternoon session, after the final University of Michigan inflation expectations survey gave up the gains that prompted the Fed to pivot toward a 75bps rate hike at its June meeting. This market reaction helps to prove the point that sometimes it's unwise to allow monetary policy to be driven by a single data point.
Online fashion retailer Zalando saw its shares plunge sharply in early Frankfurt trading after warning that profits are likely to miss expectations. The German retailer slashed full year adjusted earnings by more than half from €430 to €510m to €180 to €260m in further signs that consumer appetite for fast fashion is disappearing fast. Only last week ASOS and Boohoo in the UK similarly warned that profits were likely to be lower due to higher costs.
This warning on profits initially prompted further weakness in the retail sector across Europe, however that weakness proved to be fairly short lived, as the likes of ASOS, Boohoo, Next and Zara owner Inditex recovered off their intraday lows.
UK defence contractor Ultra-Electronics shares have surged higher after reports that Business Secretary Kwasi Kwarteng is prepared to sign off on the US takeover of the business by Advent International. Advent has said it is prepared to split the top-secret businesses into two separate legal entities, which would give the UK the power to seize control of important areas of the business if needed.
The cruise industry, like most in the travel sector, has had a difficult two years. Pre-pandemic in 2019, Carnival annual revenues were $20.8bn, and don’t look like getting anywhere near that much before 2023.
At the end of its 2021 fiscal year annual revenues collapsed to $1.9bn, and while we’re on course to beat that number quite comfortably, as well as the 2020 number of $5.6bn, it will be some time before normal service is resumed.
Today’s Q2 numbers have seen losses come in at $1.8bn, pushing H1 losses to $3.7bn. H1 revenues rose to just over $4bn, with $2.4bn of that coming in Q2, an almost 50% increase on Q1.
Occupancy rates in Q2 rose to 69%, however there is increasing evidence that rising inflation is causing a slowdown in booking rates, which has meant H2 bookings, while increasing are at the expense of lower prices. 2023 looks slightly better in terms of the outlook and that appears to be offering a lift to the share price which has risen sharply, helping lift the rest of the sector in the US.
Continuing to focus on the travel sector, this week has been another shocker for the airlines with easyJet shares hitting 18-month lows as the sector as a whole, battles a range of problems from crew shortages, flight cancellations and delays. Capping the problems facing the industry the airlines are now having to contend with the prospect of strike action, which is set to affect all the major carriers, as walkouts start to affect the schedules of Ryanair, as well as British Airways, with the prospect that these could spread.
US markets opened higher today as they look to break a run of three successive weekly losses, with lower yields on the week helping to support some of the more oversold parts of the market.
The worst performing parts of the market this week have been the oil companies, with the likes of ConocoPhillips and Devon Energy seeing falls of between 15% and 20%.
On the data front investors were paying close attention to today’s final University of Michigan sentiment survey, in light of how it was this survey that prompted the sharp policy shift by the Federal Reserve earlier this month, during the blackout period ahead of their decision to hike rates by 75bps.
Today’s numbers would appear to suggest that the Federal Reserve may have overreacted, after the inflation expectations numbers fell back to 3.1% on the one-year measure, and to 5.3% on the 5–10-year measure. The consumer confidence measure fell to a new record low of 50.
This decline in inflation expectations has served to act as an additional tonic for markets as we headed towards the weekend.
Having only last week announced that it would be increasing the dividend to $1.15c a share as well as announcing a board shake-up, optimism was high that yesterday’s Q4 numbers from FedEx would be well received. So it proved, despite missing on revenues, of $24.4bn and profits of $6.87c a share the company upgraded its full year guidance for 2023, to between $22.50c and $24.50c a share. An improvement in operating margins in Q4 also pointed to a better control of costs, sending the shares to a four-month high.
There were no surprises from the latest US bank stress tests which all of the banks passed quite easily, giving them the green light to increase returns to shareholders, as we look towards the start of the next earnings season, which starts with JPMorgan Q3 results on 14th July.
Carnival Cruise lines latest results have offered a lift to the rest of the sector with Royal Caribbean and Norwegian getting a lift.
The pound has shrugged off another record low for consumer confidence, as well as a disappointing set of retail sales numbers, with food sales showing a significant decline between April and May. Retail sales for May declined -0.7%, while the April numbers were revised down from 1.4% to 0.4% as the cost-of-living squeeze constrained consumer spending. This downward adjustment doesn’t bode well for UK Q2 GDP which could prompt the economy to slip into contraction after a decent start to the year.
There’s also been little reaction to the political fallout of the two by-election results this morning that saw both seats go to the opposition parties, on a much-reduced turnout, with currency traders barely stifling a yawn.
The euro has underperformed after German business confidence declined in June, at the same time as government ministers are warning of an energy crisis this coming winter if Russian President Putin starts to weaponize gas supplies more than he already has been doing, to the point that supplies could be cut off.
While oil prices have seen a modest rebound from their lows this week, the same cannot be said for elsewhere in the commodity space, where the sell-off in base metals is screaming economic slowdown.
Copper prices are down again and on course for their third successive weekly loss and trading at 15-month lows, and down over 15% from their highs this month. Tin prices have also imploded in the last three months, almost halving from the record peaks at $51k a ton in March, and are also down heavily over the last two weeks. Aluminium prices are also sharply lower.
Gold prices have struggled this week despite the slide in yields, although the rebound in equity markets probably hasn’t helped its cause.
Oil prices remain very much at the top of the agenda as the week draws to a close. West Texas Intermediate traded below $105 for the first time since early May as recession fears and concerns over how further US rate hikes may impact demand weigh. Vol on US Crude leads the board in terms of commodities, coming in at 57% on the day versus 40% on the month, with the UK Brent benchmark not far behind.
That move has knock-on effects on a number of related assets, including Dollar-Nokkie which threatened a test of the psychologically significant 10 levels during Thursday’s trade before retreating marginally. Daily vol here sat at 18.68%, up from 16.75% on the month, whilst the Norway 25 equity index also had a turbulent day, closing around 1% lower. Daily vol here came in at 42% against 29% on the month.
Constituents in CMC’s proprietary basket of oil and gas shares were also a sea of red yesterday with the index losing another 4%, taking losses on the week so far close to 10%. Daily vol here now sits at 75% against 61% on the month and by all accounts, this story will continue to run for some time yet.
Rounding out with crypto price action which remains broadly limited, although Polygon was an outlier yesterday with the price having been marching higher all week. Daily vol advanced to 175% against 118% on the month, with a number of existing major investors reported accumulating holdings in the token.