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European markets trade sideways as NATO beefs up its Russian response

NATO

European markets have struggled for direction today caught in a corridor of uncertainty just below recent highs, as the various meetings of NATO, EU and G7 leaders gets under way in Brussels.

Europe

The tone of the various meetings was uncompromising, with NATO agreeing to boost its deployments to the eastern borders of the NATO alliance, while warning President Putin against deploying chemical or other weapons of mass destruction. The US also announced a raft of new sanctions on up to 400 high profile Russians.

Today’s outperformers include M&G after the money manager announced a £500m share buyback program.

British American Tobacco has moved higher after being raised to overweight by JPMorgan on the potential of its vaping market, which in turn has helped give a lift to Imperial Brands

Also doing well is recently IPO’d private equity fund Bridgepoint Group after seeing underlying full year profits after tax rise to £85.7m, from £51.8m last year. Total income rose 41.1%, to £270.6m, while total assets under management rose to £32.9bn, an increase of 23.7%. This is welcome news for the shares which have struggled since peaking in November at 571p and slipped to a record low earlier this month at 257.50p.

On the downside consumer discretionary shares are under pressure, with investors unimpressed by Next’s full year results.

The main reason for the decline was the UK retailer downgrading its estimates for 2023 profit growth by £10m to £850m, as well as its revenue guidance by 2%.

The downgrade is mainly down to the closure of its websites in Ukraine and Russia, as well as the prospect of lower sales prospects due to the rising cost of living. Despite the lowering of this guidance profits are still expected to rise by 3.3%, while full price sales are predicted to rise by 5%.

Against such a challenging economic backdrop, and the fact that the shares are already down over 20% year to date, today’s declines in the share price seems somewhat a harsh reaction, such are the challenges facing the retail sector currently. Its notable that when it comes to the distribution of sales that online has been a huge net contributor with a 44.6% increase since 2020, while retail has seen a -22.7% decline.

As far as its current results are concerned the numbers were decent, revenues coming in at £4.36bn, while full year pre-tax profits came in at £823.1m, an increase of 10% on 2020 levels. 

British Airways owner IAG is also flying low after being downgraded by Deutsche Bank to hold, with the bank citing a tough operating outlook, due to higher inflation and the inability to pass on all the costs from higher fuel prices. Despite the change the losses appear to be already priced in given that the airline is already trading below the new price target of 155p. In essence Deutsche Bank appears to be stating the bleeding obvious.

US

After yesterday’s decline US markets have managed to open higher today, although none of the concerns that prompted yesterday’s weakness have gone way, with the Nasdaq underperforming.

Weekly jobless claims offered optimism that whatever other problems the US economy is facing the labour market isn’t one of them., as they dropped to a 53 year low of 187k. On the flip side durable goods orders for February tanked, sliding 2.2%, while excluding transportation we also saw a big drop of -0.6%.

This points to a rising reluctance on the part of consumers to spend money on larger big-ticket items, at a time when inflation is high, and wages are lagging.

Uber shares a modestly higher after reaching a deal to list all New York city taxis on its app.

Electric truck maker Nikola has seen its shares pop higher after announcing that it is starting electric vehicle truck production.

Olive Garden owner Darden Restaurants saw it shares initially open lower after modestly downgrading its full year expectations on profits and revenues, although the downgrade was more modest than expected. It also missed on its Q3 revenues and profits, coming in at $2.45bn and $1.93c EPS. The restaurant chain still cited decent growth; however, its inflation expectations were revised up to 6%.

FX

The Japanese yen continues to get crushed with the increasing divergence between the Federal Reserve and the Bank of Japan clobbering the currency to its lowest levels since December 2015. 

The Norwegian Krone has been the best performer after the Norges Bank raised rates as expected to 0.75%, however they also said that they would probably need to raise them again at the June meeting as well.

Away from the scandic currencies the US dollar is outperforming as US treasury yields rebound from the lows of yesterday and look to retest their recent peaks. 

Commodities

Crude oil prices have struggled for gains today despite hitting a two-week high in early trade, as conflicting news on the prospect of an Iranian nuclear deal keeps markets off balance. 

Gold prices are back on the rise again, heading back towards resistance at the $1,965 level as the US imposes a raft of new sanctions on 300 Russian MPs, as well as blocking Russian central bank gold.

Volatility

Earnings from Adobe yesterday may have come in ahead of expectations, but the accompanying growth forecasts underwhelmed, resulting in a sharp selloff of the underlying share price. That drove one day vol to 192%, up from a monthly reading of 100% and showing yet again the fragile nature of established US stocks when it comes to earnings releases.

In fiat currencies, the Yen found itself at a six year low against the US dollar, leading to some suggestions that the currency was moving into oversold territory. However, with that stream of hawkish news from the Fed and the Bank of Japan holding its easy monetary policy stance despite suggestions to the contrary that rate hikes could be seen as early as this year, the currency remains active. Dollar/Yen posted daily vol of 8.58% against 6.4% on the month, whilst daily vol for Aussie Dollar/Yen advanced to 12.12%.

Across equity indices and cryptos, markets looked relatively subdued. Soft commodities remain very much in focus with Lumber holding above 300% on the daily vol and lean hogs also showing elevated levels of price action at 75% versus 68%. However, CMC’s proprietary share baskets have also been a source of volatility, with Cannabis – made up of seven licensed medical marijuana growers – topping the board. This looks to have been driven by an erratic start to the session, but daily vol sat at 152% against 121% on the month.


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