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Bank holiday hangover for sterling and the FTSE100

FTSE100

We started with a slightly more positive tone for European markets today, in the wake of yesterday’s declines with the DAX modestly higher, although its failure to maintain momentum beyond its Friday’s close, has started to see markets rollover as we head into the close.

Europe

The catalyst appears to be on the other side of the Atlantic, as US markets come under further pressure, with the S&P500 sliding below the 4,000 level, and its 50-day SMA adding to the weaker tone.  

The FTSE100 also started positively but has subsequently come under pressure with basic resources leading the way lower along with weakness in health care. The weak pound is offering little to no respite either, despite weakness in European and UK natural gas prices, after the record gains of last week.

NatWest Group is the biggest faller after the shares went ex-dividend.

Bunzl shares have also fallen sharply despite reporting a 16.1% rise in H1 revenues to £5.65bn, and a bigger than expected jump in adjusted operating profits of 8.6% to £411.4m.

Across all its regions, revenues showed solid improvements, with the UK and Ireland leading the way with an 18.8% increase of £687.1m.

The share price reaction does seem rather odd given that the company also upgraded its full year guidance compared to its pre-close statement, and expected operating margin to be higher than historical levels. Perhaps we can extrapolate some clues from the reaction last week which saw the shares briefly trade at a new record high, before slipping back. Since the start of the year, we’ve broadly traded in a range between 3,200p and 2,600p for most of this year.

UK pub shares have continued to struggle after bosses of the largest UK brewing companies warned of mass closures in the coming months unless something was done about surging energy prices of between 300% to 500%. This would not only see a huge rise in unemployment but also seriously impact the hospitality industry more broadly with restaurant closures also likely. This would be a serious dereliction of duty on the part of politicians if this were to happen given how important pubs are in some areas of the country, and their communities.  Marston’s shares have slipped to two-year lows, while Wetherspoon is also lower, and back at levels last seen in March 2020.   

On the plus side Dechra Pharmaceuticals are higher after the company announced it was paying $260m for a small California based veterinary pharmaceutical business Med-Pharmax.  

US

US markets opened in the green, after getting off to a weak start yesterday, although the initial gains have started to melt away, with the S&P500 sliding below 4,000 as well as the 50-day SMA.

On the data front we’ve seen a modest rebound in US consumer confidence in August, helped by the sell-off in gasoline prices, as well as the bumper payrolls report in July. This better-than-expected number along with an increase in job openings in July which rose sharply to over 11.2m, up from just over 11m, may well be helping to push stocks lower, as it suggests that the US economy is strong enough to handle a more aggressive Federal Reserve monetary policy, in a classic case of good data is bad for stocks.      

Best Buy shares have moved higher after beating estimates for Q2 revenues. In July, the retailer cut its expectations for Q2 as well as the rest of this year. Best Buy said it expected same store sales to decline around 11% for the year, a big drop from the previous forecast of between 3% to 6%, when the company reported in Q1. For Q2 sales fell 13% to $10.3bn which was in line with the lowered guidance, however it reiterated its lowered guidance for the year, against a backdrop of incurring a $34m charge in respect of job cuts in its stores  

Bed, Bath & Beyond shares are up sharply for the second day in a row, ahead of a strategic update which is due tomorrow.  

The Tesla Twitter saga has taken another twist today on reports that Tesla CEO Elon Musk has sent a letter to Twitter management including further reasons as to his reasons for terminating the takeover of the business.

HP is due to report its Q3 numbers after the close this evening. Back in Q2, HP said it expected to see profits of about $1.05c a share, an upgrade to previous guidance, while also upgrading its full year guidance to $4.32c a share. In recent days concern about slowing PC demand has prompted a number of brokers to downgrade HP’s outlook particularly around print demand.

FX

The euro has proved to be remarkably resilient today, helped in some part by the decline in European power prices today, and Germany CPI hitting a 50 year high of 8.8%. The resilience has also been helped by a succession of ECB Governing Council members calling for consideration of a 75bps rate rise at next week’s meeting. Klaas Knot, the Netherlands governing council member said that he was leaning towards a 75bps move and that a move beyond the neutral rate might be required to tame inflation. The Slovenian central bank governor Vasle also said he is leaning towards 75bps as well, not altogether surprising given headline CPI is at 11% there. The ECB’s chief economist Philip Lane was a little more noncommittal merely saying that further rate rises were needed.

The pound has continued to struggle, hitting its lowest level since March 2020 for the second day in succession. Sterling has become a bit of a whipping boy in recent days from the big US banks who appear to be indulging in punishment beatings when it comes to a new game called “guess how high UK CPI can go.”

Yesterday it was the turn of Goldman Sachs, after Citigroup last week, with the US bank saying that headline inflation could rise as high as 22.4%, if gas prices remain elevated, while also revising upward the likelihood of a more severe UK recession.       

Commodities

The decline in European and UK natural gas prices appears to be being driven by this morning’s announcement from Germany that its reserves are filling up faster than expected, and could be at 85% by next month. This could see a slowdown in demand in the short term and help to keep a lid on prices in the short term.

Crude oil prices have continued their recent choppy theme, after rallying strongly yesterday on concerns over supply disruption in Iraq and Libya, we’ve seen a sharp reversal today as more hawkish rhetoric from central banks fans concerns that the actions by central bankers will cause a sharp demand slowdown. This logic comes across as rather circular given that rising prices will have a similar effect by causing demand destruction.

Firmer short-term yields are weighing on the gold price which slipped back to one-month lows yesterday and continues to look as if it could open up a move below $1,700 an ounce.    

Volatility

The rough rice contract had something of a turbulent start to the week, but early losses were swiftly recovered. The area around $17.50 has provided repeated resistance and with no clear fundamentals in play, this could well be the result of a technical reaction. Daily vol came in at 102% against 47% on the month.

Growing expectations over the pace of future rate hikes at the ECB has been lending support to the Euro as the new week gets underway. Comments from Frankfurt have hinted that next week’s monetary policy call could see a 75bps hike in interest rates as the battle against inflation continues. Daily vol on Euro/US Dollar printed 10.3% against 9.72% for the month, whilst Euro/Swiss sat at 7.9% on the day versus 6.65% on the month.

Amongst single stocks, NASDAQ-listed Humanigen was something of a stand out in the wake of its close on 14% slide. The company received a delisting notice from the exchange, given the stock has been trading below the minimum $1 qualifying price since the release of some disappointing research findings last month. There’s a 180-day window for the company to resolve the situation, but the shock for investors evidently left its mark. Daily vol stood at 259% against 134% on the month.

Finally, crypto assets look relatively subdued with only modest pockets of elevated volatility being seen. Litecoin saw the highest levels of price action as it continues to try and claw back recent losses. Daily vol sat at 70.73% against 66.14% on the month.


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