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Equity markets shrug off hawkish central banks as DAX closes at a record high

European markets have ended the week on a positive note as expectations of more stimulus from China, and the belief that the current cycle of rate increases is close to coming to an end, has seen the DAX push up to another new record high.  

Europe

The FTSE100 has also enjoyed its best weekly performance since April with this week’s winners being the likes of Glencore and Ocado, while concern over higher interest rates has acted as a drag on house builders, with Barratt and Taylor Wimpey underperforming.

Tesco shares are also lower despite a decent set of Q1 numbers which showed like-for-like sales in UK stores increase by 9% to £10.8bn with group retail revenues increasing by 8.2% to £14.83bn.

Its Booker business also continues to perform well with like-for-like sales increasing by 8% to £2.27bn.

Fuel was the only area which saw like-for-like sales decrease to the tune of 15.7% to £1.7bn.

On a positive note, for consumers, Tesco did say that there were signs that inflation is starting to ease across the market.

On guidance Tesco remained optimistic that it would be able to deliver the same level of adjusted operating profit, as last year, despite the ongoing pressure on its margins, while keeping retail free cash flow in the region of £1.4bn to £1.8bn.

Travis Perkins shares have taken a swan dive after the DIY retailer announced it was downgrading its expectations for full year adjusted operating profit to around £240m. The company blamed higher interest rates and weaker consumer confidence along with high inflation for the downgrade.

The downgrade is also hitting the likes of B&Q owner Kingfisher as well as Wickes shares which are down heavily.  

There’s been very little reaction to today’s statement from ITV that they are looking at a possible acquisition of All3Media the company behind such productions as Fleabag, Gogglebox and Call the Midwife. The company is currently jointly owned by Liberty Global and Warner Bros Discovery, and would be considered a significant enhancement to its own ITV Studios production capability. Today’s announcement would appear to kill the idea that ITV management are looking to sell off their ITV Studios operation, an absurd idea that happened to be doing the rounds towards the end of last year.     

US

US markets have picked up where they left off opening higher with this week’s gains being driven not by tech, but by travel and leisure companies. This week we’ve seen the likes of Carnival, Norwegian Cruise Lines and Southwest Airlines post solid gains as confidence continues to return to the travel sector.

Microsoft shares closed at record highs yesterday on the back of a couple of positive broker notes which expressed optimism over its ability to be able to monetise its exposure to AI.

Having closed at 9-month highs yesterday Adobe shares have continued their recent gains after reporting Q2 numbers that came in ahead of forecasts, while also raising their full year outlook. Q2 revenues rose 9.8% to $4.82bn while profits came in at $3.91c a share. For Q3 the company said it expects to see revenues of $4.83bn to $4.87bn and profits to come in between $3.95c and $4 a share, driven by growth in its AI products. On an annual basis Adobe expects to see revenues to come in between $19.25bn and $19.35bn, and profits of $15.70c a share.  

Virgin Galactic shares have surged after the company said it plans to fly its first commercial passenger space mission as soon as the end of this month, from its spaceport in New Mexico. If successful it would then fly another one in August.

Another big gainer is iRobot is higher after Amazon’s deal with the company obtained UK regulatory approval. Unlike the film of a similar name, iRobot makes robot vacuum and floor cleaners, as well as developing solutions that involve battlefield reconnaissance and bomb disposal.    

FX

The Japanese yen has continued to remain under pressure after the Bank of Japan resisted the temptation to change its current monetary policy settings.

For all of this week’s hawkish statements from the likes of the Federal Reserve and the European Central Bank markets remain to be convinced that they will be able to follow through on their commitments to raise rates as much as they say they will.

It’s also not a surprising conclusion to come to given the circumstances. If as a central bank you really believe that rates need to rise by another 50bps by year end, why would you pause now?

Consequently, the pound has been one of the main beneficiaries of this shift, not only today but this week as well, ahead of an expected 25bps rate hike from the Bank of England next week, with the UK currency hitting its highest levels against the US dollar since April last year, as it looks to close in on the 1.3000 level. On the plus side a higher pound will help the Bank of England in its fight to get inflation under control as long as Governor Andrew Bailey can resist the temptation to talk the currency down, as he has been known to do in previous meetings, every time he opens his mouth.    

Commodities

After two weeks of losses crude oil prices have struggled to rally this week despite two days of strong gains this week. Prices plunged on Monday on concern over economic weakness in China, and while there are expectations that Chinese authorities will launch new stimulus measures, oil markets remain far from convinced given this week’s disappointing economic data.

Gold prices slipped back to 3-month lows earlier this week on the back of this week’s rise in yields which came on the back of this week’s hawkish rate guidance upgrade, although they have rallied off the lows. Even with US 2-year yields rallying strongly again today, pushing up to 3-month highs, gold is proving to be remarkably resilient. The rise in 2-year yields is all the more puzzling given that we’ve seen a sharp slowing in 1 year University of Michigan inflation expectations to 3.3% from 4.2% in May.   

Volatility.    

The ECB may have caused little surprise with yesterday’s rate hike, but the accompanying hawkish tone regarding the likelihood of another step-up next month was perhaps more telling. EUR/USD moved back to levels not seen in over a month and found itself as one of the most active currency trades. One day volatility printed 8.3% against 6.25% on the month.

CMC’s proprietary basket of collaborative technology stocks pushed out to fresh highs for the year. Adobe – the cohort’s biggest constituent – served up some positive results last night bolstered by AI, whilst number 2 play in the basket Microsoft was also cheered, again by the AI theme, pushing its valuation out to new all-time highs. One day vol on the basket hit 38.57% against 29.94% for the month.

That "feel good" factor off the back of this week’s FOMC meeting continues to drive US equity indices higher, even though there’s the reality that one more policy tightening hit may be along at the end of next month. The NASDAQ posted its sixth successive session of gains on Thursday, with one day volatility printing 19.93% against 15.74% for the month.

And in commodities, there was some notable price action seen amongst distillates. Despite reports earlier in the week of higher-than-expected reserves, US Heating Oil prices advanced on Thursday to levels not seen in around eight weeks. One day vol on the contract stood at 34.85% against 29.94% on the month.


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