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Soft inflation, and lower US dollar propels equity markets higher

us dollar

We’ve seen another day of strong gains for European markets, with the FTSE100 undergoing its best one-day gain since early June, after US CPI came in softer than expected, and the latest set of UK bank stress tests gave the sector a clean bill of health.Europe

The FTSE250 has also undergone a strong session led by a strong performance from pub chain JD Wetherspoon and Royal Mail owner International Distribution Services.

Wetherspoon shares have surged to one-month highs after saying that current trading had been much better than expected with like for like sales rising 11% in the first quarter compared to the same period last year. Compared to FY22, like for like sales were 11.5% higher in Q4 to date and by 12.9% year to date.

IDS shares have risen after reporting that the ongoing strikes would be coming to an end after postal workers accepted the 6% pay deal and a one-time bonus of £500.

Today’s inflation numbers won’t have altered the calculus around a 25bps US rate hike in two weeks’ time, however the direction of travel when it comes to the wider trend suggests it could be the last one in the current rate hiking cycle. It is this shift that markets are reacting to, with yields falling sharply in the US, as well as here in the UK.

It’s been a good day for UK banks with Virgin Money, Lloyds and NatWest leading the pack after the Bank of England said that even if rates continued to go higher, they were in strong position to handle the problems caused by the sudden rise in interest rates that is currently putting the UK economy and households under increasing pressure financial stress.

These banks share prices have borne the brunt of concerns over the UK economy in recent months, so today’s results are a welcome reminder of their resilience and will hopefully mark a turning point in sentiment in the coming weeks.  

Today’s inflation news out of the US has also been good news for UK 2-year yields which have fallen 25bps from their recent peaks, which in turn has helped to give a lift to house builders, with Persimmon leading the way. 

A strong performance in metals prices is also offering a boost to the mining sector, with copper prices hitting 2-week highs helping to lift the likes of Anglo American, Glencore and Rio Tinto. 

US

The S&P500 and Nasdaq 100 have both broken above their highs of this year, and to the highest levels since April 2022 after US CPI came in softer than expected, increasing hopes that the Federal Reserve rate hiking cycle is in its final stages. Yields have fallen sharply with the Nasdaq 100 leading the gains, closely followed by the S&P500.

Today’s gains have been led by US banks, with the smaller ones seeing a particular benefit on relief that rates probably won’t be going much higher, with the likes of Zions and Comerica, leading the way. Whether that exuberance will last as we look ahead to the start of bank earnings season on Friday remains to be seen.

Activision shares finished the day 10% higher yesterday after a US judge gave the green light for the Microsoft deal to go ahead, following in the footsteps of EU regulators who also gave the deal the go ahead. Yesterday’s surprise decision now puts the spotlight back on to the UK regulator who blocked the deal and who came out and said that they were open to further discussions with a view to allowing the deal to pass.

Netflix shares are set to be in focus after UBS said it could see at least another 20% of upside in the share price, due to the company’s crackdown on password sharing.  

FX

US CPI numbers for June were never likely to change the calculus behind another 25bps rate hike when the Fed meets in two weeks’ time. Having hit a peak of 9.1% this time last year, today’s numbers have seen US CPI slow further to 3%, while core CPI slowed to 4.8%, a much softer number than expected. The nature of today’s figures suggest that whatever other Fed officials would have us believe further rate hikes beyond July will be a big ask, and probably won’t happen, hence today’s US dollar weakness. That said we can still expect Fed officials to continue to adopt a hawkish tone on the basis that they won’t want market expectations to get ahead of themselves, thus keeping the option of further hikes very much on the table.

Nonetheless this shift in the last few days does help to explain why the US dollar has slipped so much against the Japanese yen in recent days, although some are suggesting it is because we might see a policy shift from the Bank of Japan when it meets at the end of this month. Whichever way you come at it from, the net effect is likely to be the same, in that US and Japanese rates are likely to converge, rather than diverge.

The US inflation numbers could also be good news for UK homeowners as they will reduce the pressure on the Bank of England to be more aggressive in terms of their own rate hiking policy. If this month’s expected July hike from the Federal Reserve is in fact the last one, then the Bank of England may only need to do another 50bps before calling a halt, which means that current UK pricing is way too high. 

If anything, it would be enormously helpful if the energy price cap was now confined to the dustbin of history due to its role in keeping UK headline inflation above the level of where it should be. The cap is also serving to exert upward pressure on wages as consumers struggle with the higher cost of living due to energy prices not coming down quickly enough.

The Canadian dollar has popped higher after the Bank of Canada raised rates by 25bps to 5%, while saying that it didn’t expect CPI to return to target until 2025.

Commodities

The weaker US dollar, along with an expectation that we could be close to the peak when it comes to the current rate hiking cycle has seen oil prices push higher, with Brent crude pushing above $80 a barrel for the first time since late April.

Gold prices have also seen a similar lift as lower yields and a weaker US dollar help to push prices back to their 50-day SMA, in the hope that we could see a move back to the June highs at $1,985.

Volatility

It was a big day for gaming stocks on Tuesday with Microsoft winning an appeal to buy Activision dominating. That was sufficient to send shares in the target – the heaviest weighted constituent in CMC’s proprietary gaming basket – some 10% higher on the day, whilst peer Unity, who recently announced a partnership with Apple – wasn’t far behind either. One day vol on the basket printed 37.53% against 29.72% on the month.

As for commodities and it was Palladium prices that continued to find themselves in focus, although some support does appear to be emerging around the $1200 to $1250 level. As noted yesterday there are concerns that demand here is tailing off as the popularity of electric cars limits the need for catalytic converters. One day vol on the metal stood at 45.6% against 43.91% for the month.

Fiat currencies were relatively subdued with traders posturing ahead of some key US inflation releases due in the coming hours. Dollar weakness is in evidence with many now expecting to see a significant decline in the CPI print. Against the Yen, the dollar extended its run of recent losses breaking below 140 to return to four-week lows. One day vol printed 8.58% against 8.08% on the month.

And the Hang Seng was one of the most active equity indices on Tuesday. Hopes of economic stimulus measures from Beijing are helping offer some support to the index which narrowly avoided testing fresh lows for the year at the end of last week. One day vol came in at 23.88% against 22.5% for the month.


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