It’s been another negative session for European markets with continued uncertainty about the economic outlook, and higher interest rates dampening sentiment, with the rise in UK gilt yields affecting the FTSE100 especially with banks and housebuilders feeling the draught the most.
Europe
It’s not been a great year for UK housebuilders, they are amongst the worst performers year to date on the FTSE100, with losses in excess of 50%, largely on the basis that a higher interest rate environment is likely to put the sector under pressure on sales. Today’s warning today by Barratt Developments about a “less certain” outlook hasn’t helped, sending its shares to its lowest levels since later 2013 after it reported that average private reservations fell to 188 per week, down from 281 a year ago.
The entire sector has seen big losses this year despite little evidence of a significant slowdown in profitability, in fact Barratt went on to say that pre-tax profits are still expected to meet expectations for the year. Nonetheless we’ve seen similar falls in the likes of Persimmon and Taylor Wimpey as the sector continues to lose further ground on concerns over lower demand and lower selling prices.
Banks are also under pressure on the back of rising long-term rates, with Barclays and Lloyds feeling the pressure the most, amidst concern over the potential impact that further upward pressure on mortgage rates, might have on their loan books, as well as the wider housing market. With UK gilt yields rising above 4.5% the risk is that higher rates could tip house prices lower, and leave a lot of mortgage holders in negative equity in echoes of what happened in the 1990’s.
Darktrace shares have drifted back towards their lows of the last 6 months after the company warned that FX effects had created a $17.1m headwind in their Q1 numbers which are likely to impact annual recurring revenue for the rest of 2023. Other than that, the overall numbers look good with Q1 revenues up 37% to $126.3m, while reiterating its target for year-on-year revenue growth of between 30% to 33%.
US
US markets opened modestly higher after their modest declines of yesterday, after today’s September PPI report broadly came in line with expectations, and ahead of the release of tonight’s Fed minutes.
Moderna shares have surged after announcing a deal with Merck on advancing an MRNA cancer vaccine treatment.
Chipmakers have also continued to come under pressure with Intel lower on reports that the company is set to cut 1,000s of jobs over the course of the next few months.
FX
The US dollar has made a new 24 year high against the Japanese yen, moving above the levels that we saw prior to the previous intervention, as it breaks above 146.00 and closes in on the 150.00 area. The move higher is prompting speculation of further intervention from the Bank of Japan, and it could still come, however the previous move by Japanese authorities was never about stopping the decline in the yen but more about slowing it down. If the move up to 150.00 is gradual in nature than the prospect of further intervention may well diminish.
The pound has undergone another choppy session as traders wrestle with the mixed messages they seem to be getting from the Bank of England and its support for the gilt market. Yesterday Bank of England governor Andrew Bailey emphatically said that support for the gilt market would end at the end of this week, a claim that was undermined by a report from Bank of England officials that said the scheme could be extended if market conditions demanded.
As mixed messages went the last 12 hours have been an extraordinary muddle and has done nothing for the central banks already battered credibility. It seems that every time Andrew Bailey opens his mouth, he has this tendency to send the pound sharply lower. Maybe it would be better for all concerned if he could co-ordinate his messaging better?
The pound has managed to recover some of the losses from late last night after chief economist Huw Pill said that the central bank remained committed to a significant monetary policy response in the coming weeks suggesting the prospect of a 100bps rate hike in November.
Commodities
Crude oil prices have continued to slip back, on course for their third successive daily decline, as continued fears over future demand serve to cap the recent rebound. Prices had been rising on the back of the recent OPEC+ deal to cut production, however continued concerns about future global demand and the bleak outlook from the IMF is raising the possibility that supply issues will be less of an issue than demand destruction.
Volatility
Chinese Tech stocks took something of a beating on Tuesday with calls from the US to further limit export controls across the Pacific and a game of catch up being in play after the golden week holiday both taking a toll. CMC’s proprietary basket of shares representing the sector came under marked pressure as a result, the underlying selling off by around four and a half percent, driving daily volatility to 78.75% against a monthly print of 52.8%.
That volatility in China also played out in the Hong Kong market with the local Hang Seng index seeing elevated levels of price action during the session. That’s now trading down at fresh multi year lows, with daily volatility now sitting at 36.87% against 29.42% on the month.
CMC’s proprietary basket of licensed cannabis growers took another dip lower yesterday, extending the reversion seen at the end of last week and now risking a break to fresh lows for the year. Last week’s enthusiasm for the sector has certainly faded fast, with one day volatility now sitting at 120.53% against 109.38% on the month.
Antipodean currencies found some respite during yesterday’s session, but this proved to be very short lived, with the down trend on both dollar pairs soon being re-established. Daily vol on Kiwi-Greenback came in at 19.24% against 17.1% on the month, whilst for the Aussie Dollar against the Greenback, 17.31% on the day and 16.3% on the month were recorded.
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