Today’s mood on European markets has been a predominantly downbeat one, with weakness in Asia translating into a negative open, as concerns over slowing global growth and persistently higher inflation, kept up the pressure on valuations.
Europe
Losses accelerated as US markets opened with the IMF adding to the negative tone by downgrading its global growth forecast for next year to 2.7%, while admitting that its target could fall further if economic conditions continue to deteriorate. Its chief economist Pierre Olivier Gourinchas said the worst is yet to come, and that 2023 could be a very bad year. The fund also warned that inflation is set to rise further and could peak sometime later this year, suggesting the need for more rate rises.
A rise in covid cases in China also weighing on risk appetite with the usual suspects of basic resources and energy acting as the largest drag, as concerns over a possible global recession weigh on risk.
Amongst the biggest fallers on the UK market have been the likes of Legal & General, Aviva and Prudential after the Bank of England intervened further in UK government debt markets. Their warnings of market dysfunction, while driving yields lower is making investors a little more nervous about this area of the market. Asset managers are also lower with St. James Place and Hargreaves Lansdown near the bottom of the UK index.
US
US markets have continued where they left off yesterday opening lower, with the tech heavy Nasdaq leading the way lower, while the S&P500 has also fallen to its lowest levels this year, as concerns about the start of earnings season and possible downgrades keeps investors on the back foot.
With little sign that the Federal Reserve is set for a pivot and this week’s US CPI unlikely to offer much in the way of support for markets investors appear to be hunkering down, while yields on US treasuries are mixed near to their recent peaks.
There were some pockets of positivity with American Airlines saying that it expected to see Q3 sales above its previous guidance, when it reports next week, with a 13% rise in revenues from the same period in 2019. Pre-tax margin is expected to be higher as well at 4.5%. This saw the shares open strongly higher initially however the gains were short lived.
With Delta Airlines due to report later this week this is welcome news for the sector, however some caution is warranted given that average fares would have been lower in 2019. This appears to have been reflected in early trade with the shares giving up their early gains, with United Airlines also struggling.
Uber and Lyft shares have also come under pressure after the US labour department announced a change that would determine whether workers can be classified as contractors of employees. DoorDash shares have also slipped back.
FX
After yesterday’s spike in gilt yields the Bank of England intervened again today, widening its purchase program to inflation linked gilts. This intervention overshadowed better news on the UK labour market, which saw unemployment fall to a fresh 48 year low, of 3.5%. Wage growth including bonuses also edged higher to 6%, however once again the focus was on the economic activity rate which rose to 21.7%. The number of long-term sick rose to 2.5m, while vacancies fell by a modest 46k, to 1.25m. Offsetting that was the latest grocery inflation data from Kantar which showed food prices rose by 13.9% in the three months to October 2nd, driven by milk and margarine.
The pound did see some modest weakness in the aftermath of the data, but nothing particularly substantive, and has since edged its way higher as it finds some support in and around the 1.1000 area.
Commodities
Crude oil prices have slipped back for the second day in a row, retreating from their highest levels in 6 weeks yesterday, as fears over future demand serve to cap the recent rebound. Prices had been rising on the back of the recent OPEC+ deal to cut production, however the continued rise in covid cases in China is raising the possibility that supply issues will be less of an issue than demand destruction caused by further lockdowns, as the weather gets colder.
Gold prices are still in the same downtrend they’ve been in since March, with the failure to move above the 50-day MA last week keeping the pressure on the downside. A combination of rising yields and a strong US dollar is keeping the bias very much towards further losses and the two-year lows seen at the end of last month.
Volatility
The cyber security sector found itself attracting attention yesterday, evidently following some downbeat analyst comment on specific companies in the sector. This was accompanied by a degree of read across, with CMC’s proprietary basket of cyber security stocks falling to fresh lows for the year as a result. The question is whether companies can afford to cut corners here to mitigate wider economic headwinds but one day volatility advanced to 48.85% against 40.96% on the month.
Raw sugar prices reached levels not seen for almost three months yesterday, although the fact crude oil prices eased back a little did serve to limit gains here. One day vol on raw sugar came in at 36.75%, compared to 29.32% for the month, but with those global recession fears still looming, sugar could remain a somewhat active trade for a while, yet.
Shares in The Hut Group fell almost 7% during Monday’s session. There was no fresh news out on the company, but downside pressure continues to build here. One day volatility advanced to 211% against 164% on the month as a result. Tesla also saw a choppy start to the week with the electric car maker reporting record sales in China for September. The daily net move was limited but inter day price action was sufficient to lift daily vol to 112% against 81.75% on the month.
