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Pre-Fed jitters send yields higher, and stocks lower

a white arrow signifying rising prices

European markets initially started the day in positive territory, however the gains soon disappeared in the wake of a supersized rate hike from the Swedish Riksbank of 100bps pushing their headline rate up to 1.75%.

Europe

The size of the hike has shifted the focus back to tomorrow’s Fed rate decision and the possibility that the US central bank might do something similarly aggressive. This seems a stretch given that US rates are already quite a bit higher than Swedish ones, however in this case discretion appears to be the better part of valour, and markets have ratcheted lower, as rates have gone higher.

On the companies front we’ve seen a couple of company updates.

With the shares languishing well below the levels the company was spun out, GSK spin-off Haleon was hoping to see investors greet today’s H1 numbers with enthusiasm.

Initially there was no such luck, however as the day has progressed the shares have edged higher. H1 revenues rose 13.4% to £5.19bn, driven largely by its pain killer brands of Advil, Theraflu, and Panadol, while posting adjusted operating of £1.19bn. For the full year Haleon says it expects to see full year organic revenue growth of between 6% and 8%, which seems on the low side when you consider that this winter could see the first proper flu season post covid.  On the Zantac claims which has hammered the share price management rejected any idea that they should shoulder liability over the antacid drug.

B&Q owner Kingfisher shares have slipped back after reporting H1 numbers that were in line with estimates. H1like for like sales came in at £6.81bn, a decline of 4.1%, year on year, although on a pre-pandemic basis, they are up by 17.4%. Margins have taken a hit, down 130bps to 36.7%, with adjusted pre-tax profit down 29.5% to £472m. The biggest hit to profits came from the UK business which saw a fall of 41.3% to £339m. The Polish business continues to go from strength to strength, while the outlook for Q3 is encouraging with like for like sales down by 0.7%. Full year guidance on profits was kept unchanged at between £730m to £770m.

Another sector that has struggled to recover from the pandemic has been the travel sector, with TUI’s latest update, while positive, not really moving the dial share price wise. The company reaffirmed its full year goals to return to positive earnings, with Q4 expected to deliver another positive quarter for hotels and resorts. Airlines was also profitable despite various disruptions, while the cruise division seeing some signs of a significant improvement. UK bookings are running 10% ahead of pre-pandemic levels with the Canary Islands one of the more popular destinations.

We’ve also seen further weakness in house builders on concerns over an aggressive rate hike this week from the Bank of England, with Persimmon and Barratt Developments amongst the worst performers.

Ocado is also on the receiving end of a pile on after HSBC downgraded it over concerns about smaller basket sizes. Sector peer and partner Marks & Spencer is also lower, as is Sainsbury and Tesco, after Kantar as Ireland became the latest country to see grocery inflation at 14-year highs, following on from the UK last year.     

US

US markets opened lower taking the lead from a European session that initially started out brightly and then faded as yields continued to push higher, after the Riksbank surprised markets by hiking by 100bps, while also warning that more was to come.

Ford last night warned that its Q3 numbers would see costs come in over $1bn higher than anticipated a few months ago, due to higher payments to suppliers. The company said it sees up to 40-45k cars lacking parts by the end of the quarter. It expects Q3 adjusted EBIT to be between $1.4bn and $1.7bn. Ford says it still expects to meet its full year view of adjusted EBIT guidance of between $11.5bn and $12.5bn.

Nike shares have also slipped back ahead of the release of its Q1 numbers next week after Barclays downgraded the company over fears that its China business which saw a fall of 19% in its Q4 revenue numbers, could come off even worse in Q1.

FX

The US dollar has pushed up towards last week’s highs, with the continued rise in yields helping it on its way. It’s been aided on its way with the 2 year yield edging ever closer to the 4% level, all the while the 10 year yield has moved solidly above its previous peaks at 3.5%, ahead of the conclusion of this weeks Fed meeting tomorrow.

The only two currencies striving in any way to hang on to its coat tails have been the Swiss franc and the pound both of which are expected to see large rate increases this week, as well. The Bank of England probably has the trickier job given the fiscal stimulus likely to be announced on Friday, however in a sense that should also make it easier to go for the 75bps option. If precedent is any guide, they will probably bottle it, and go for the easy option which is 50bps.

Commodities

A strong US dollar, rising yields and concerns over demand as the global economy slows is weighing on crude oil prices again, as prices slip back towards the lows, as markets gear up for multiple rate hikes this week from the Federal Reserve, Bank of England and Swiss National Bank. Fears over tight supply aren’t having the supportive effect on prices that would normally expect, however it also means they probably won’t dip too far either.

Gold prices have continued to struggle, failing for three days in succession to push above the $1,680 area, as higher yields and a stronger US dollar exert downward pressure on it.

Volatility

Several pharmaceuticals stocks came under pressure on Monday after President Biden’s comments regarding the end of the COVID pandemic took a toll. Whilst some medics question whether such a call is premature, this aligns with recent statements from the WHO and just one example here is BioNTech, co-developers of the Pfizer C-19 vaccine. The US ADR fell by more than eight and a half percent, driving daily vol to 104% compared to 66% on the month.

Crypto volatility was once again elevated amidst concerns that the Federal Reserve would continue with its policy of aggressively hiking interest rates. The idea of a 100bps rate hike is now looking less likely given pressures which are being exerted on the housing market, but the trajectory remains upward. Daily vol on BTC USD came in at 73.08% against 48.85% for the month, with similar moves being seen amongst other digital assets, too.

US Natural Gas prices have been under pressure for the last week but appeared to rebound off around eight week lows during yesterday’s session. US shale producers are reportedly struggling to keep up with demand and that’s going to add another layer of concern into a market which is already looking constrained as we move into the winter months. Daily vol was recorded at 77.97%, up from 68.4% on the month.


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