After a poor start to the week, European markets have edged modestly higher today, except for the FTSE 100, which has moved above the 7,500 level, helped by a strong performance from HSBC, and a more positive vibe from Chinese markets.
Europe
This outperformance has come about after Chinese health authorities signalled significant progress in pushing booster rates higher and pledging to try and push up vaccination rates in older people, helping to lift HSBC, Prudential and Standard Chartered.
HSBC shares have also been helped by the bank announcing it had agreed to sell its Canadian operation to Royal Bank of Canada for $10bn in cash. This appears to be the latest example of Asia’s largest bank looking to gravitate away towards its core markets in Asia, and in so doing helping to keep its shareholders onside as it looks to boost the resilience of its core operations, as well as improving pay-outs.
In recent years HSBC management have had to tread a careful line between its business in Asia markets, and its dealings with the Chinese government, and its UK operations. The recent decision to cancel the dividend after pressure from UK regulators did not go down well with Asia shareholders, with today’s decision on its Canadian operations perhaps an arbiter of things to come in respect of its UK operation, which Ping An, the banks largest shareholder, urging senior management to embark on some form of spin-off, or separation of its Asia assets, and the rest of the bank.
A rebound in oil prices is also helping the energy sector with BP and Shell recovering their losses from yesterday. The recent weakness in oil prices is prompting speculation that OPEC+ might cut production further in order to help support the market. Coming off the back of its announcement yesterday that it was acquiring C4X Discovery for $402m, AstraZeneca this morning announced it was acquiring Neogene Therapeutics for $320m. Unlike C4X Discovery, Neogene is a biotech company which focuses on the discovery, development and manufacture of T-cell receptor therapies which target cancer cells specifically.
EasyJet shares have slipped back despite delivering an upbeat outlook for its new fiscal year, in terms of overall bookings. This is encouraging, with the second half of the year a significant improvement on the H1 loss of £545m, narrowing its full year loss to £178m. There is still some concern compared to the likes of its peers Jet2 and Ryanair, that it appears to be lagging behind when it comes to maximising its capacity and pushing up its load factors. The airline said it expects to see Q1 load factor growth of 10bps. For 2023 easyJet expects to see a 25% increase to 38m seats, and for H2, 56m seats, a 9% rise.
Wise shares have slipped back despite reporting a 55% rise in H1 revenues of £397.4m Total income rose 63% to £416.1m, although gross profit margin slipped back by 4.6bps to 63.1%. Profit before tax came in at £51.3m. Total customers increase to 5.5m, taking total volumes up to £51.3bn, with £27bn of that in Q2. Wise kept its full year guidance of total income growth of between 55-60% unchanged.
US
It’s been a flat open for US markets, after yesterday’s falls, as higher yields keep investors on the back foot, and as we head towards the end of the month tomorrow. The continued jawboning from Fed officials about the prospect for higher rates is keeping investors cautious and constraining the upside in the short term.
After yesterday’s big falls in China linked stocks, we’ve seen a decent rebound in the likes of Alibaba, JD.com and Tencent on the slightly more positive sentiment coming out of China.
FX
It’s been a quiet day for currencies with the main standout being the Australian dollar which has rebounded strongly on the slightly more upbeat mood coming out of China, after falling sharply yesterday.
The pound has shrugged off slightly weaker than expected lending data, which showed October mortgage approvals fall to their lowest levels since June 2020 at 59,000, while net consumer credit slowed to an annualised 7%, as consumers pared back borrowing as the new energy price cap kicked in. The euro has shrugged off weaker than expected headline CPI numbers from Spain and Germany, for November, while Italian PPI followed in the footsteps of German PPI last week by falling sharply in October to 33.7%, down from 52.9%.
It’s been notable in the past few days that central bankers on both sides of the Atlantic have been at pains to convince the markets that we should prepare for more aggressive action on rates in the coming months, whether it be Bullard at the Federal Reserve, or President Christine Lagarde at the ECB. Unfortunately for them the market doesn’t appear to be listening, and when you think about it why should we? For most of last year these same central bankers were assuring us that inflation was transitory despite a lot of evidence in the underlying data to the contrary.
Now they are telling us that they don’t think that inflation has peaked, and that it could go higher. While they could well be right, the data at the moment doesn’t appear to support that assertion, as we start to see sharp falls in headline PPI, now in Italy as well as Germany and headline CPI also looks as if its starting rise at slower rate. Its therefore not surprising that having been wrong on transitory, markets are reluctant to believe them now.
Commodities
Crude oil has rebounded on speculation that OPEC+ might consider another output cut in the wake of the recent weakness in oil prices. The head of the IEA Fatih Birol has urged caution in this regard, saying that the global economy remains in a fragile state, and that a production cut could cause more harm than good it if it kills demand even further.
Gold prices are shrugging off slightly higher US yields, with the slightly weaker US dollar helping to reverse the losses of yesterday, as it continues to trade in a range between $1,730 and $1,770.
Volatility
Price action for Credit Suisse stock was elevated once again during Monday’s session after the bank warned of substantial losses, its bond prices slumped and the cost of insuring against default risk rose, too. The underlying fell by more than 9%, driving one day volatility to 101.95% against a one month reading of 67.38%.
Oil prices are back in focus too, with West Texas Intermediate rallying off the lows not seen since the start of the year. Markets are eyeing a rebalancing by OPEC at this week’s meeting, which is lending some support as a result. WTI moved up from just over $74 a barrel to more than $78 during Monday’s trade and has moved even higher overnight. One day vol sits at 51.9% against 43.64% on the month.
Gasoline prices also ventured higher, although gains proved to be unsustainable, with weaker demand continuing to take a toll here. One day volatility on RBOB Gasoline printed 51.83% against 44.37% over the month.
The yen has also been active with those protests in China weighing then upbeat comments from the Bank of Japan boosting sentiment in the currency. Overall direction for the last few weeks has been rather limited but yesterday’s travel on euro yen from 143 to 145 and most of the way back again was sufficient to lift daily vol to 12.56% against 10.96% on the month.
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