European markets have picked up where they left off on Friday with another positive session. The FTSE 100 has risen to its best level since August 2018 driven by resilience in commodity prices after China relaxed Covid travel restrictions, helping to push the likes of Glencore and Antofagasta higher as copper prices push to 6-month highs.
The UK index has underperformed relative to its European peers with the DAX performing better rising to its best levels since March last year, and up over 20% from its October lows.
Today’s relaxation of travel restrictions between China, Hong Kong and the rest of the world has helped give markets a further lift as the New Year feel-good effect continues to drive sentiment, pushing stocks higher and the US dollar lower.
Having come off the back of some decent retail updates last week from the likes of Next and B&M European Retail, the next two weeks are expected to add additional insight into a sector that could well have been impacted by the recent transport strikes.
This week we’ve got M&S Tesco and Sainsbury, followed by Ocado next week, and optimism is high that despite the challenging economic outlook, pre-Christmas trading is likely to be decent, after Lidl reported a record day for its business on the 23rd December.
After a poor 2022, Ocado shares have raced out of the traps this year, up over 20% in the last 5 days alone, and on top of the FTSE 100 Also performing well this year are Sainsbury, Next and JD Sports.
US markets have picked up where they left off on Friday opening higher, with the Nasdaq 100 leading the way higher as the weakness in the US dollar which we saw on Friday continued into the new week.
The reaction to last week’s weaker than expected services ISM and payrolls numbers is still driving sentiment, ahead of this week’s December CPI and an expected speech by Fed chair Jay Powell tomorrow.
Goldman Sachs shares are in focus ahead of its Q4 earnings next Monday after the company announced it was looking to cut 3,200 jobs this week as it looks to make savings against a backdrop of rising costs. Its investment banking division has underperformed in recent earnings updates which suggests a lot of the job cuts could come there. Headcount in the bank has seen a big jump since the pandemic rising to more than 49k at the end of Q3. The bank is also expected to post large losses in its retail banking division which has turned out to be loss-making due to rising loan loss provisions.
Lululemon shares are getting pummelled after updating its expectations on revenues and margins for Q4. The retailer said it expects to see higher revenues of between $2.66bn and $2.7bn, however they have said that gross margins could decline by between 90 and 110bps, a sharp fall from the previous expectation of a rise of 10 to 20bps, due to higher admin costs. Nike and Under Armour shares are also underperforming.
The US dollar has continued to come under pressure today, as the selling from last week's payrolls report and ISM services numbers continues to drive direction.
The euro has broken above the 1.0700 area again, hitting its highest levels since June last year, with the potential for further gains towards the May peaks at 1.0806.
The pound is also gaining ground pushing further away from its 1.2000 support area and closing in on the 1.2200 level, and 19 December peaks of 1.2240.
An expectation that US rate rises are closer to their end game is helping to pull gold prices back to levels last seen in June last year. A decline in US yields and a weaker US dollar, driven by Friday’s ISM services report and weak wage data has prompted an expectation that we may only see a 25bps rate hike in February as opposed to a previously expected 50bps move. The next key resistance area is $1,896 which is the 61.8% Fibonacci retracement of the decline from the highs last year at $2,070 and the twin lows at $1,614 in October.
Crude oil prices have got off to a strong start to the week after China reopened its borders with Hong Kong in further signs that a reopening of the borders will generate a pickup in demand. While markets are treating a China reopening story as a very much binary outcome, the end result is likely to be much more nuanced. Even as economic activity looks to resume, a spiralling infection rate, heading into Chinese New Year could well see significant bumpiness in any recovery during the first quarter of 2023.
We’re also seeing a strong performance in base metals for similar reasons, with copper prices rising to their highest levels since June last year.
The Aussie Dollar had a strong finish to the week against the Greenback, with China’s economic reopening being seen as supportive here. This move does come with the obvious risk that should any COVID spike prove too damaging then gains will find themselves capped, but the pair closed the week around highs last seen almost a month ago, with momentum very much intact as the new trading week starts, too. One day vol printed 18.66% against 13.58% for the month.
Sterling also made some meaningful gains over the US Dollar on Friday afternoon, adding more than two and a half cents. Those resurgent US recession fears and a mixed bag of UK economic data are both lending some support, although the scale of the move here underlines the beleaguered state of Sterling. One day vol on cable hit 13.03% against 10.29% for the month.
Banking stocks have been in focus of late with higher interest rates and the idea that at least some corners of the global economy may avoid the worst of a recession lending support. Towards the end of last week, Standard Chartered found itself as the centre of attention amidst news that a suitor from the Middle East had been assessing the bank as a takeover target. That isn’t set to come to anything however and the subsequent profit taking saw one day volatility on Friday pushed out to 304.91% against 100.45% on the month.
And finally, Natural Gas prices remain under pressure. There was some bargain hunting in play on Friday as the US cash contract briefly traded below the late 2021 lows, but warmer weather is adding sustained downside here and ought to offer inflationary pressures across Europe something of a break. One day volatility printed 99.59% against 87.31% for the month.