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Rolls-Royce stands out as European markets await the Fed

It’s been a weak session for European markets with the FTSE100 coming under pressure after mining giant Rio Tinto reported a fall in H1 profit and said it was cutting its dividend again, which has weighed on the basic resources sector.

Europe

The luxury sector is getting a battering after LVMH reported sales in the US which were worse than expected, prompting similar weakness in Hermes and the rest of the sector. This weakness has weighed on the CAC 40.

Banks are also lower after Lloyds Banking Group fell short of expectations on Q2 profits due to higher-than-expected provisions for non-performing loans. Despite this disappointment the bank still revised up its full year guidance on net interest margin to above 3.1%, despite a fall in Q2 NIM from 3.22% in Q1 to 3.14% in Q2. Today’s weakness in the Lloyds share price has also translated into weakness in Barclays and NatWest Group ahead of their Q2 numbers later this week, although NatWest management also have the distraction of the departure of CEO Alison Rose after she admitted she was the source of the leak of details of the bank’s relationship with Nigel Farage, which is also raising questions over the tenure of the rest of the board, including Chairman Howard Davies.

We’re seeing all manner of sound and fury about the nature of Alison Rose’s departure, however amidst all the hot air and hyperbole from politicians and activists alike, one escapable fact remains. The NatWest CEO broke the rules around GDPR and client confidentiality. If anyone else had committed a breach of FCA rules they would be subject to disciplinary proceedings and possible dismissal, pure and simple. The fact that the NatWest board didn’t initially recognise that raises serious questions about the bank’s governance and the rules around the behaviour of staff, in relation to GDPR.

This is it in a nutshell, anything else is a distraction, and while some are criticising the government for their intervention into the current debate over her future, it does need to be remembered that the UK taxpayer still has a 38% stake in the bank.

On the plus side, we’ve seen another strong performance from Rolls-Royce, after the company issued an upgrade to its full year guidance ahead of its H1 trading statement next week. The shares have surged to their highest levels since March 2020, as the return to normal in civil aviation has helped boost revenues, as well as cash flow ahead of expectations. 

Ocado shares have also continued to rise in the aftermath of this week’s settlement with Autostore patent dispute which saw the company receive a payout of £200m.  

US

US markets opened modestly lower ahead of today’s Fed decision where it is expected that the US central bank will raise rates by 25bps to 5.25% to 5.5% and their highest level in over 20 years. The key focus however won’t be on the decision but on how Fed chairman Jay Powell frames the debate over what comes next, and the prospect of further hikes.  It’s unlikely that Powell will resile from the previous guidance in June, that the central bank is data dependent and that further hikes are needed, but it will be how he frames that against the backdrop of CPI at 3% and that a lot of the impact from previous hikes has yet to bleed through.

Microsoft shares have slipped back despite reporting a strong set of Q4 numbers which showed that revenues rose by 8% to $56.2bn, a new record for an individual quarter, pushing total annual revenues to $211.9bn, with profits coming in at $2.69c on the quarter and $9.68c on an annualised basis.

The various business segments saw a strong performance from Intelligent Cloud which rose to $24bn, an increase of 15%, while cloud services revenue from commercial and consumer products for Microsoft 365 and Office 365 saw strong gains.  On the downside, revenue from personal computing fell by 4% to $13.9bn. This was mainly down to weak Windows OEM revenue, which fell 12%, and devices revenue which fell 20% on the quarter. Xbox content and services revenue on the other hand managed to perform well, rising 5%, with hopes high that the Activision deal will complete by October 18th as the company hopes to clear the final hurdles with UK regulators over the deal.

Today’s weakness appears to be being driven by concern over revenue growth in its Azure business which is expected to rise between 25% and 26% in Q1. This compares to 42% last year and 48% revenue growth the year, with some disappointment that the move into its OpenAI hadn’t delivered a higher estimate.

Snap shares have also dropped sharply after the social media company downgraded its revenue forecasts for Q3, saying that they expected to see sales of between $1.07bn to $1.13bn. Q2 revenues were also disappointing, falling 4%, coming in at $1.07bn, while losses came in at $377m. Could this be a harbinger for disappointment from Meta later today when they report after the market closes?

On the plus side Alphabet owner Google has seen its shares rise after following a strong set of Q1 numbers with a similarly strong performance in Q2.

Total revenues rose by 7% to $74.6bn with a strong performance from Google Search which posted an increase to $42.63bn, with YouTube also posting a strong quarter, and an increase in revenue to $7.66b, compared to a weak Q1 of $6.69bn.

Q2 profits were also strong, coming in at $21.83bn, comfortably beating last years $19.45bn.

One of the main reasons for the underperformance in Q1 was down to a $2bn charge in relation to severance costs for 12,000 job losses. In Q2 the company set aside a further $69m in relation to optimising office space, on top of the $564m set aside in Q1.

FX

It’s been a mixed day for the US dollar, sliding back against the Japanese yen, which appears to be getting a bid from the general risk off mode in equity markets, as well as caution ahead of this week’s Bank of Japan rate meeting. 

The Australian dollar is amongst the largest fallers on the back of this morning’s weaker than expected Q2 CPI number which slipped from 1.4% to 0.8%, ahead of next week’s RBA rate meeting, feeding into an expectation that the central bank could remain on hold at 4.1%.  Weakness in metals prices also appears to be weighing on the AUD.

The Canadian dollar is also a little softer on the back of weakness in oil prices. 

Commodities

Crude oil prices have slipped back from three-month highs ahead of today’s interest rate decision from the US Federal Reserve, where interest rates are expected to hit their highest levels in over 20 years. The last few days have seen strong gains on the basis that supplies are expected to remain tight, with both Saudi Arabia and Russia determined to keep a floor under prices.

Gold price appears to have natural resistance just below $2,000 an ounce ahead of today’s Fed meeting. Assuming that the Fed is close to the end of its rate hiking cycle then gold should remain well supported, however any restatement of the hawkish narrative of June could see weakness towards $1,950 in the short term, and the 50-day SMA, which should act as support.

Volatility

Airbus stock came under pressure on Tuesday as investors digested news from RTX in the US – the owners of Pratt & Whitney – that a number of Airbus planes would need to be inspected earlier than had been planned, due to faults detected in engine systems. With Airbus set to report earnings today as well, further detail here could be telling. One day vol on the stock came in at 65.87%, significantly up on the 28.6% one month reading.

Soft commodities remain in focus with Wheat prices having tested five and a half month highs during Tuesday’s trade before reverting. The IMF yesterday noted that abandoning the Black Sea export route would add 10-15% to underlying prices, but with this already more than factored in and the EU confident it can handle all Ukraine’s exports via land crossings, the profit taking was of little surprise. One day vol on Wheat printed 63.32% against 54.66% for the month.

Renewed fears that the Eurozone may slide into recession served to weaken the Euro on Tuesday. With the next ECB rate meeting also looming, this could remain an active trade in the near term. One day vol on Euro-Swiss printed 5.46% against 5.25% for the month.

And Hong Kong’s Hang Seng index continues to find support, having tested fresh highs for the month on Tuesday. Hopes that new economic stimulus measures from Beijing will succeed in bolstering demand are in play here, with one day vol standing at 29.83% against 24.09% for the month.

 


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