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Equities slide back as diplomatic breakthrough proves elusive

Ukraine Foreign Minister Kuleba

Yesterday’s market rebound turned out to be as big a leap of faith as most people supposed it might be, as today’s peace talks in Turkey between Ukraine foreign minister Kuleba and Russian foreign minister Lavrov got underway, and then finished just as quickly. 

Europe

It soon became rapidly apparent that Lavrov had no mandate to decide on anything, and consequently the talks turned out to be every bit as useful as a chocolate teapot, with the Russian Foreign Minister seemingly more interested in trying to justify yesterday’s bombing of a children’s hospital in Mariupol than indulging in proper diplomacy. 

There seems to be a widespread naivety on the part of markets, as well as some politicians that Russia is interested in going down a diplomatic path, when all its actions to date appear to suggest it only has one agenda, and it’s not a peaceful one. 

Consequently, we’ve seen a little bit of the gloss come off yesterday’s rebound, although today’s weakness hasn’t come anywhere close to reversing the rally from yesterday. This would suggest that what we’ve seen these past few days is a resetting of expectations about what comes next, with investors largely unsure whether to get back in, or wait for another dip lower.

Evraz shares have fallen back sharply after the UK government announced it was sanctioning Chelsea owner, and majority shareholder in Evraz, Roman Abramovich, with Polymetal also falling back as well.

It’s not been a great start to 2022 for the Balfour Beatty share price, hitting 15-month lows earlier this week, the shares have rebounded today after reporting full year underlying operating profits of £197m, beating expectations of £172m. In December, the company said it expected to see its order book to decline to £15.5bn, however this also came in better than expected to £16.1bn. Since CEO Leo Quinn took over in 2014, Balfour has increasingly focussed on high margin work, and maintaining a reliable and healthy cashflow.

Revenues were slightly disappointing coming in below expectations at £8.28bn, however the improvement in profits suggests that margins continue to be the main driver of the business, while average net cash rose by 27% to £671m, from £527m a year ago.

Purplebricks shares have slipped back modestly on the news that CEO Vic Darvey is stepping down, however with the shares already languishing close to record lows its hard to imagine things getting any worse for the business. At its most recent set of numbers the company showed little signs of an improvement in its fortunes with a £12.9m H1 loss, and a modest decline in revenues to £41.3m. It was also less than confident about the outlook for 2022 and 2023, citing an uncertain economic and interest rate environment. The business still faces the uncertainty over the lawsuit it is facing from 100 former agents which could see its costs increase further. . 

US

US markets also opened lower in the wake of the weaker tone today in Europe, as yesterday’s optimism over peace talks gave way to much more pragmatism as it became apparent that Russia isn’t particularly interested in a ceasefire at this point in time.

The latest US CPI for February came in at 7.9%, while weekly jobless claims rose slightly to 227k, as did continuing claims to just below 1.5m.

Amazon will be in focus today, the shares rising over 4%, after announcing a 20:1 stock split as well as a $10bn share buyback. With a share price currently in excess of $2,700 this move had been touted as a possibility earlier this year as a way to help broaden the shareholder base, after Alphabet did the same thing in February.   Over the past two years we’ve seen the likes of Apple and Tesla do the same thing, with 4:1 and 5:1 respectively in August 2020, while in July last year Nvidia did a 4:1 split.

These moves give a decent indication of how expensive these stocks have become over the last ten years taking them out of reach of ordinary retail investors. Even so, even with today’s stock split, the share price will still be a hefty $135 for a single share.

The rebound in oil prices is helping a rebound in the likes of Chevron after a big decline yesterday.   

FX

The euro briefly lurched higher, briefly popping above 1.1100 after the ECB indicated no change in monetary policy. This wasn’t a surprise, however given what is happening with inflation, the central bank signalled it would be tapering its asset purchase program steadily over the summer, with a view to ending it in Q3. This was a little unexpected as was the ECB removing the language that rates could be lower than they currently are.

This move appears to open the central banks options with respect to potentially raising rates by the end of this year, although it doesn’t mean that they will. This hawkish pivot also serves to underline what a bind the European Central Bank finds itself in.

We’ve subsequently seen government bond yields push higher across the bloc, however it’s difficult to really see what else the ECB can do at this point. As it is they’ve upgraded their CPI forecasts for this year to 5.2% from 3.1% , while downgrading 2022 GDP to 3.7% from 4.2%. This still seems too conservative, given what we’ve seen in the past few weeks when it comes to upward pressure on prices, and further upward pressure likely to be seen over the next two to three months.   

The ECB has a 2% inflation mandate which they are missing by a mile, and this morning the latest Italy PPI number for January came in at eye watering 41.8%, and that’s before we factor in the energy price and broader commodity price spike that we’ve seen in the last two months.

Italian yields have surged, with the 2 years up by 17bps, and given how markets reacted to an early comment from Lagarde when she first took over at the central bank, that the ECB isn’t there to close spreads, managing this problem is likely to be even more challenging.

As a reminder EU inflation is already at a record high of 5.8% and given the events of the last few weeks, its likely to go even higher in the coming months. Against that backdrop, doing nothing is a luxury the ECB does not have. 

The latest US inflation numbers came in a s expected with CPI rising by 7.9% in February, and a fresh 40 year high, driven largely by food and energy. Core prices also rose sharply, rising to 6.4%, and in so doing sealing the deal on a US rate rise next week.

Commodities

After yesterday’s big fall in crude oil prices, we’ve seen a modest rebound as markets contemplate whether OPEC members have the will, or even the capacity to fill the gap from a loss of Russian output. There seems to be some uncertainty as to whether some members have the capacity to up their output at a time when prices have soared since the start of the year.  Comments from the Iraqi oil minister today would appear to suggest that they are keen to achieve a balance between supply and demand and that if they wanted to do more, they probably could. 

Gold prices have rebounded modestly from support at $1,970 and edged back above the $2,000 an ounce, however such was the fall yesterday, there is a suggestion we might see a little bit more weakness in the short term before we attempt another move back to the recent highs. There could also be a reluctance to pile back in again after traders got caught out by yesterday’s sharp decline. 

Volatility

Equity markets posted a sharp reversal during Wednesday’s session, triggered by a slide in many commodity prices. One index which saw price action exaggerated as a result was the China 50, where one day volatility pushed out to 68% against a one month reading of 35%, although European markets weren’t far behind either, with even Germany’s DAX recording 59% vol on the day.

Onto those commodities and it was something of a mixed bag, but Low Sulphur Gas Oil tanked by almost a third during yesterday’s session, reversing gains from earlier in the month. The drove one-day vol on the asset out to 179% up from a monthly reading of 87%.

In fiat currencies the theme remains broadly the same with the Dollar – Rouble pair once again showing daily vol of more than 800% but the Mexican Peso has also come onto our radar. Yesterday’s shift to a more risk-on mindset, combined with news of upbeat inflation from the country strengthening calls for a rate hike lifted the Peso and pushed one-day vol to 18.16% against a monthly print of 12.67%.

As for single stocks, bakers Greggs remains in focus as bargain hunters moved in following the results-based sell-off earlier in the week. Losses have now largely been recovered but one-day vol was driven out to 255% against the monthly reading of 105%.

Finally, with cryptos, despite Bitcoin’s impressive move higher, daily vol there remains below the monthly figure, but IOTA was once again the standout, reaching 474% on the day against 320% on the month..


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