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European markets set to close at a three month low

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After the big losses of yesterday, as well as this week, European markets have tried to muster a semblance of a rebound as we head into the weekend, but are struggling to gain any sort of foothold.

Europe

A slide in commodity prices weighing on the FTSE100, with copper prices sliding to their lowest levels this year, and oil prices on course for their first negative week since early May.

Glencore shares are outperforming after reporting that it expects to make record profits from its commodity trading division, for the first half of this year.

The mining company said it expects to see profits in excess of $3.2bn for H1, which is already on the top end of expectations, for the entire year. Even without a similarly strong H2 profits are set to exceed the levels seen over the whole of 2021 when the company saw profits of $3.7bn.

The rest of the basic resource sector is under pressure on the weakness in copper prices, with Rio Tinto and Antofagasta under pressure, while the slide in crude oil prices is weighing on BP and Shell.  

Today’s Q1 trading update from Tesco has elicited a fairly indifferent response, with the shares edging higher on the day. The UK’s number one food retailer kept its full year profits guidance unchanged, as UK like-for like sales fell sharply by -1.5%, much more than expected. Management was keen to stress that they were seeing early signs of changing customer behaviour, which suggests that customers are favouring lower margin own brand items over branded goods.

On a broader level the performance from its Booker operation, as well as central Europe helped push total like for like sales up by 2% year to date to £13.57bn.

US

After a torrid week US markets are trying to rebound as we head into the weekend, although the upside progress is being tempered by concerns over a slowdown in the US economy against a backdrop of a more aggressive Federal Reserve.

On the downside Adobe shares have slipped back despite the company beating expectations on both revenues and profits. Q2 revenues came in at $4.39bn, a rise of 14% year on year, while profits came in at $3.35c a share. The reason for the slide came with the forward guidance which saw Adobe cut its full year revenue view, with management citing a Q3 revenue forecast to $4.43bn below expectations of $4.52bn, and a full year forecast of $17.65bn, down from $17.9bn. The reason for the caution is an uncertain economic outlook combined with the withdrawal from Russia and Ukraine.  

Energy shares are also lagging, on the back of a slide in oil prices with ConocoPhillips and Devon Energy under pressure.  

FX

The Japanese yen has seen a sharp decline after gaining sharply in the leadup to today’s Bank of Japan meeting after the central bank showed no inclination to deviate from its accommodative monetary policy.

At his press conference Bank of Japan governor Kuroda said there was no plan to raise the ceiling on the 10-year yield range, keeping the central bank as a global outlier when it comes to monetary policy. The risk is that in keeping the yen weak, when the time comes to tighten policy, it may well take much longer than expected if inflation starts to run away.

The Swiss franc has continued to gain as the fall out from yesterday’s surprise rate hike continues to reverberate through the FX markets, coming out as the best performer this week, second to the gain in the greenback, which is still up near to 20-year highs, and is having another move to the upside as we head into the weekend, up above 135.00 again against the yen.

The Norwegian Krone has been the worst performer this week along with the Canadian dollar.    

Commodities

Crude oil prices look set to post their first weekly decline in over a month as weakness in equity markets weighs on the demand picture, against a backdrop of more aggressive central banks looking to tackle inflation by taking measures to slow demand.

It’s been a bad week for gold prices, on course for its biggest weekly decline since early May, as a stronger US dollar and tighter monetary conditions push yields higher. The deterioration in equity markets is lending an element of late week support, however the rise in yields is also acting as a drag. 

 


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