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European markets set to post weekly gain; sentiment remains fragile

FTSE100

In a week that has seen significant volatility and headline risk, European markets look set to break a run of three successive weekly declines, despite the horrors being played out in Ukraine by Russian forces.

Europe

This week’s price action has been a roller-coaster ride for the DAX, as well as the FTSE100 with both hitting multi month lows on Monday, before rallying hard on Wednesday.   

Today’s move higher, which has seen the DAX post a one week high before pulling back, was given added traction early on by a headline from Interfax that claimed Putin had said there had been certain positive shifts in the talks with Ukraine. Those gains didn’t last long due to a lack of detail, and the fact that Russia is still bombing Ukrainian cities, as well as moving additional military resources towards Ukraine.

While this week’s rebound is a welcome respite after three weeks of losses, any deterioration in sentiment over the weekend could see these gains reversed in a heartbeat if Russia chooses to escalate further, as well as potentially crossing the red line of chemical, or biological weapons use.

The type of market reaction that we saw this morning, to a vague but positive headline, perfectly encapsulates the many cross currents at play in terms of algo and news flow risk and serves to indicate how fickle sentiment currently is when tracking the ebb and flow of the headlines around this conflict.   

Amongst some of today’s moves we’ve seen digital education provider Pearson shares rise sharply on reports that private equity company Apollo is considering making a cash offer for the business. Apollo now has until 8th April to firm up any approach or withdraw for 6 months.

We’ve also seen gains in travel and leisure stocks, although again we are off the highs, with eastern European based Wizz Air leading the way, followed by easyJet and IAG.

It does need to be said that while the rebounds seen today and this week look impressive, if you zoom out and look where the shares were before the conflict started, we are still quite a bit lower. We are seeing outsized moves daily in both directions, as investors try and price the outlook for companies at a time when the outlook remains highly uncertain.

Berkeley Group’s shares have edged higher after the house builder said it was on track to meet its full year guidance for its current fiscal year, as well as the next 3 years. Forward sales are expected to be above £1.7bn at year end, while net cash is forecast to be £900m.

Ocado shares have moved higher after the company said that the International Trade Commission had found in its favour in its dispute over patents with Germany’s AutoStore. The company said that in light of this ruling that it expected that the High Court in London would also rule in its favour in a few weeks’ time.

Internet security company Avast became the latest in a long line of companies to announce that it was suspending all of its operations in Russia. 

US

US markets took their initial cues from today’s European session, opening modestly higher though this hasn’t endured with weakness in the likes of consumer discretionary after the latest consumer confidence numbers from Michigan saw another fall in March to 59.7, and an 11-year low.  

Alphabet and Meta shares are in focus after the EU and UK opened an antitrust investigation into the companies over a 2018 advertising deal called Jedi Blue, on concerns it may have been anti-competitive, with Meta coming under the most pressure.    

Rivian shares are on the slide again after reporting a net loss of $2.5bn in Q4, pushing full year losses up to $4.7bn. Total revenue for the year was $55m which was generated by the sale of 920 of its trucks. In terms of orders the company has 83,000 for its pickups and SUVs, however it will struggle to get anywhere near that number in terms of annual deliveries any time soon. Notwithstanding supply chain concerns over semiconductors the firm's target of 25,000 annual deliveries still seems optimistic. Its factory in Illinois still needs to get up to speed, while the company intends on spending $5bn on another factory in Georgia. It still has plenty of cash in reserve, however it will still need to spend a lot of that in boosting its production capacity, with the intention of turning out up to 150k vehicles a year.  

BlackRock shares are also in focus after the asset manager admitted that it was taking a $17bn hit on its Russian exposure because of sanctions, making them to all intents and purposes “stranded assets” with no resalable value. To put that in some kind of context BlackRock has over $10trn of assets under management so while the headline number looks large it's still a small percentage of its overall assets.   

FX

The UK economy managed a decent rebound in January after the Plan B induced slowdown from December, with the latest GDP numbers rebounding 0.8%, after a -0.2% contraction in December. The services sector helped drive the rebound as the index of services rose by 0.8%. The rebound in economic activity wasn’t confined to services, with strong activity in industrial and manufacturing production as well as construction output.

Despite the strength of these numbers the pound has struggled to gain any traction even though the numbers make it increasingly likely that the Bank of England will raise rates again next week by another 0.25%. A lot of the weakness appears to be being derived from concern about how the UK economy and ergo the UK consumer will be able to absorb the sharp price rises that are coming down the pipe in food and energy at the same time as National Insurance rates are going up. With the EU talking about the prospect of fiscal stimulus we have a UK government seemingly intent on exacerbating a fiscal squeeze by imposing one of its own in the form of higher taxes. Utter madness.

The Canadian dollar has outperformed today after the latest payrolls report showed a big drop in the unemployment rate to 5.5% from 6.5%, while the number of full-time jobs jumped by 121.5k in February, and part time jobs rose by 215.1k. The strength of the number would appear to indicate that the Canadian economy is finally gaining traction from its winter slump with the participation rate also jumping from 65% to 65.4% and its highest level since September last year.    

Commodities

This week we’ve seen Brent crude oil prices hit their highest levels since 2008, just shy of $140 a barrel, however the lack of follow through has seen prices slide back against a backdrop of optimism that might see some countries increase supply.

This optimism needs to be tempered by the fact that any increase in output from OPEC would not be enough to offset the loss of Russian supply, but there is an expectation that they could go some way to doing so if there was a risk that too high prices might cause demand destruction.

Concerns about an inflation shock continue to dominate sentiment and although gold prices came within touching distance of their previous record highs at $2,075 an ounce, prices have since slipped back sharply. This appears to have been prompted by this week’s sharp rise in yields caused by the ECB’s hawkish pivot, which saw demand for gold fall away, as well as prompting some profit taking.  

Volatility

Chinese stocks have been thrust into focus of late with another big sell-off being seen on Thursday. In what some are terming the worst sell off since 2008, there’s talk that the SEC has flagged some Chinese companies listed in the US as being in breach of regulatory issues. That served to up a 500-point sell-off on the China A50 index, driving one day vol to 67% up from a monthly print of 36%. Our proprietary China Tech index was similarly impacted after gapping lower at the open, with one day vol of 215% against a monthly print of 120%.

Energy prices continue to show some easing from those recent highs, with Low Sulphur Gas Oil still a standout in terms of price action. One day vol sat at 186%, up from a monthly reading of 93%, whilst Brent Crude also came off around $20 a barrel yesterday, moving daily vol to 117%.

In terms of single stock CFDs, dual-listed Chinese companies JD.com and Pinduoduo both made it onto our list. JD’s daily vol hit 383% against 160% whilst Pinduoduo sat at 350% against 185%. The latter may be the result of a fat finger trade, but JD is worth watching with the stock sliding again early on Friday.

Those currencies from countries bordering Russia are again dominating but one interesting cross to be on the radar is Euro CAD. Ongoing Euro weakness has been in evidence for some time and even yesterday’s hawkish tone at the ECB was insufficient to change the outlook here. One day vol on EUR/CAD advanced at 12.68% against 9.2% for the month.

 


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