Inversion aversion keep investors cautious

Inversion aversion keep investors cautious

It’s been another turbulent session for markets in Asia overnight with US markets plunging overnight, on concerns over the possibility of a looming recession, though crucially we haven’t broken below the lows seen earlier this month.

The Nikkei 225 has also fallen sharply, however the Hang Seng has rebounded from its lows after US President Trump suggested a meeting with China’s Xi Jinping to discuss the crisis there.

As a consequence European markets opened modestly higher, with the exception of the FTSE100 which is lagging behind, due to weak performances from oil and gas and basic resource stocks after yesterday’s sharp decline in the oil price, over future demand concerns.

The flight to havens we’ve seen in the past 24 hours has been as a consequence of what is known as a yield curve inversion in the US and UK bond markets, which historically tends to be a harbinger of a possible recession.

An inversion such as this generally tends to support a view that short term monetary conditions are too tight, and that these short rates need to be lower. That would be a an eminently sensible view point if interest rates were at normal levels. As we all know they clearly aren’t at normal levels so it’s difficult to argue that historical precedents apply. When interest rates are at record low levels and yield curves are so flat inversions tend to be a consequence of the flatness of the curve. As such cause doesn’t always lead to effect.

That being said it isn’t hard to argue that from an economic conditions point of view that the global economy has its problems economically as well as politically. You don’t need a yield curve inversion to recognise that the world is at the mercy of a global collective of political pygmies.

It’s been a difficult few months for betting companies having to absorb the consequences of the rolling out of maximum stakes on fixed odds betting terminals, and GVC Holdings share price has been one of many that has underperformed. Today, the company who owns Ladbrokes and Corals, has posted its latest first half numbers, and which have come in slightly better than expected despite reporting a loss. A rise in net gaming revenue of 5% to £1.8bn, on a proforma basis, was better than expected, which helped boost underlying profits before tax to £212m.

Despite this the company swung to a pre-tax loss of £12.3m after booking an amortisation charge of £224m on the Ladbrokes deal. The company also upgraded its full year guidance to between £650m and £750m from £650m. The company also upped its dividend.

Royal Bank of Scotland can’t seem to catch a break at the moment, downgraded by Macquarie yesterday over concerns over downward pressure on profitability and net interest margins, it has been followed by HSBC with a similar downgrade, sending the shares down over 6% to 2 and a half year lows, below 190p.

Despite yesterday’s sharp falls US markets look set to open higher, next Presidential tweet notwithstanding as investors get set for the next set of US economic data, and latest company earnings announcements.

US investors reacted badly to the latest results from US retail giant Macy’s, and the disappointing guidance from IT giant Cisco Systems, yesterday sending the shares sharply lower, in an overall sell off that was the worst one day performance for US markets since the beginning of the month, such has been the volatility these past few days.

Today we’ll get to see the latest numbers from Walmart, one of the few US retail stocks that has managed to adapt to the presence of Amazon in the US retail space, though they have also proved to be far sighted enough to look overseas for growth, as shown by their $16bn acquisition of India’s Flipkart just over a year ago.

At the end of Q1 the company reported a big jump in profits to $3.8bn, while revenue rose 1% to $123.9bn, slightly below expectations. The US business saw its best performance in 9 years, however the company did warn it might have to raise prices if tariffs started to impact profit margins, which means that we could see the company warn on guidance, given recent events.

Over the last three months US retail sales have continued to look positive, and with consumer confidence at decent levels, expectations are high that we’ll see a similarly decent performance in Q2. The company is expected to sales rise to $130bn and profits come in at $1.216.

Today’s US retail sales numbers for July should also act as a decent barometer as to whether the sharp rise in US consumer confidence seen last month translated into consumers opening their wallets. These are expected to see a rise of 0.3%.

In the UK the pound has continued to claw back lost ground against the euro ahead of the latest retail sales numbers for July with expectations that we could see a decline of 0.3% after the strong rebound of 1% seen in June.

This comes across as a little pessimistic given some of the events that we saw in July as well as the hot weather, and the fact that wages are rising. July saw England win the cricket World Cup, the British Grand Prix and Wimbledon take place against a backdrop of blistering barbecue and ice cream friendly weather. If that doesn’t lift spirits it’s hard to argue what can.

The US dollar has shrugged off the latest volley of rhetoric from President Trump directed at Fed chair Jay Powell, labelling him “clueless” and labelling the inverted yield curve “crazy”

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