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Rising US yields and guidance downgrades weigh on markets

It’s been another negative session for European markets as this week’s sell off continues to gather momentum, with the DAX down for the 4th day in a row, and the FTSE100 down for the 3rd straight session.


A combination of rising US yields, today’s decline in UK yields notwithstanding, along with concern over earnings guidance downgrades is weighing on markets today, with the weakness in US markets weighing on the broader risk outlook.

European chipmaker Infineon followed Qualcomm in the US last night, by providing weak Q4 guidance on chip sales. Q4 sales are expected to rise to €4bn, below estimates, while margins are also expected to come in weaker. 

There have been some positives, with banks and housebuilders seeing a rebound in the aftermath of the Bank of England’s decision to raise rates by 25bps, as traders pare back bets on peak bank rate. This optimism over a lower terminal rate has helped the likes of Barclays, NatWest eke out gains, on the FTSE100, along with the likes of Taylor Wimpey and Barratt Developments.

Rolls-Royce shares are also outperforming after confirming last week’s upgrade to full year guidance for underlying profits. Underlying H1 revenues soared to £6.95bn, an increase of over 30% and comfortably ahead of forecasts, while operating profits rose to £673m. Underlying operating margins also more than trebled to 9.7% while pre-tax profits rose to £524m. The improvement was driven by the civil aerospace business which saw H1 revenues rise to £3.26bn, while defence also saw a strong first half with revenues of £1.9bn, however it was the improvement in profits and margins in its civil aerospace division which stands out, with operating income there rising from a deficit of £79m a year ago to £405m in this H1.

Next is holding up well after upgrading its full year guidance for group profit before tax by £10m to £845m. Full price sales for Q2 showed an increase of 6.9% year on year. Since the last trading statement in June sales have risen by 3.7%, ahead of the 0.5% guidance issued at the time. The revised guidance also indicates that full year sales will increase by 1.8% to £4.68bn.

This improved guidance has also helped the likes of JD Sports outperform.

LSE shares fell to 3-month lows on the open before recovering sharply after releasing H1 numbers that were underwhelming. Total income rose by 11.8% to £3.99bn, however operating profits fell by 18.7% to £729m on the back of lower margins. EBITDA margins fell by 3.5bps, to 46.9%, although the company reiterated full year guidance of 48%.  The main growth area was in data and analytics which saw growth of 7.66%  

Medical devices group Smith & Nephew has slipped back after reporting a fall in H1 trading profits and margins. Revenues did rise by 6.6% to $1.38bn, with guidance on that nudged higher to between 6% to 7% revenue growth, however margin guidance was left unchanged at 17.5%. 


US markets have taken their cues from the continued weakness in European markets opening lower even as weekly jobless claims came in as expected at 227k, while continuing claims ticked up to 1700k. The latest unit labour costs data for Q2 also pointed to weaker inflation, while productivity went up to 3.7% suggesting a more resilient US economy.

Services sector activity has remained resilient in July with the latest ISM survey showing economic activity slowed modestly to 52.7, although price paid edged higher to 56.8, underlining the risks of stick services inflation. On the other hand, employment slowed to 50.7, from 53.1.

PayPal shares have slipped on the open after reporting a 7% rise in net revenue of $7.29bn and profits of $1.16c a share. On the face of it the numbers were positive, however operating margins were disappointing, coming up short at 21%.

Chipmaker Qualcomm has continued today’s negative tech theme, its shares sliding after the company, which is also a key supplier for Apple reported weaker than expected guidance for Q4. Q3 revenues came in at $8.44bn, a decline of 23%, although profits beat forecasts at $1.87c a share. For Q4 guidance was nudged lower to between $8.1bn and $8.9bn on revenues, with lower profits estimates of $1.80c a share. Qualcomm also said it expects to have to reduce its headcount due to weaker than expected demand out of China. 

Apple is due to report its own set of Q3 numbers after the US close and will be hoping that it can draw a line under successive quarters of revenue declines. Q2 was the second quarter in succession Apple had been unable to grow its revenues, the first time this has happened since 2016, and they will be keen to avoid another fall. Q3 revenues are expected to come in at $81.53bn. and profits of $1.20c a share. 

We’re also getting Q2 numbers from Amazon, in the wake of a big recovery in the share price since the March lows. Appetite for Amazon shares was also helped in respect of their Q1 numbers which saw net sales rise 9% to $127.4bn from the same quarter a year ago. North America saw sales rise by 11% to $76.9bn no doubt helped by the strong rebound in US retail sales we saw in January. Q2 net sales are forecast to come in between $127bn and $133bn, a rise of between 5% and 10%, while profits are expected to come in at $0.35c a share.


The pound is the worst performer after the Bank of England raised rates by 25bps to a new 15-year high of 5.25%. This was the baseline assumption given an expectation that we could see further sharp falls in the CPI headline rate in just under 2 weeks’ time when we get July CPI when the lower energy price cap kicks in.

There was a 3-way split on the voting with Catherine Mann and Jonathan Haskell voting for a 50bps move, while external MPC member Swati Dhingra maintained her no change stance. The bank also downgraded its expectation for GDP growth for this year to 0.5% from 0.75%. They also downgraded their end of year inflation forecast to below 5%.

The pound had already been trading lower in the leadup to the decision and has remained weak as markets price in the prospect that the terminal rate could come down further still. 

It was also noteworthy that the bank said that rates would need to stay sufficiently restrictive for longer to be able to return inflation to its 2% target, which reading between the lines suggests that rates could be close to their peak. Deputy Governor Ben Broadbent more or less admitted this with his comments that UK policy was restrictive already, and that UK rates are now likely above the neutral rate.

The Japanese yen has pulled off recent lows, after the Bank of Japan intervened for the second time in a week to contain a rise in 10-year JGB yields. The US dollar briefly pushed up to a new four week high, before retreating, with the wider risk off tone continuing to act as a support for the greenback.


Crude oil prices have pulled away from one-week lows on reports that Saudi Arabia would be extending its recent voluntary production cuts into September. Yesterday prices fell sharply despite sharp falls in inventories as a stronger US dollar and concern about the growth outlook pulled prices off 3-month highs.  

Higher US yields as well as a stronger US dollar aren’t doing gold prices any favours, as prices slip to 3-week lows, with downward pressure on bond prices being driven by plans to issue $103bn of new issuance next week. 


Earnings from Diageo, the makers of Guinness, may have topped expectations on Tuesday with price hikes lending support, but gains proved to be short lived. The stock sold off in early trade on Wednesday and attempts to find support have so far proved futile. One day vol stood at 65.28%, more than double the one month reading of 28.75%.

Vodafone also proved active on Wednesday although again the upside proved to be short lived. A deal signed to see services resold in Germany received a positive reception with shares adding around 5% but this was soon eroded. One day vol on the mobile telecoms play sat at 63.69% against 37.7% for the month.

CMC’s proprietary basket of social media stocks saw elevated levels of price action. The vast majority of constituents traded markedly lower on the day, although Vimeo proved to be a significant outlier. The streaming provider released better than expected earnings, resulting in a 15% uptick for its stock. That still left the basket down more than 2% on the day but one day vol sat at 57.97% against 40.15% for the month.

And wheat prices continue to trend lower following a brief hiatus in the wake of Russian attacks on Ukrainian grain silos. Prices are now close to levels last seen when the Black Sea export deal expired. One day vol on the grain stood at 66.63% against 55.4% for the month.

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