European markets have undergone a rather subdued session ahead of tonight’s Fed rate decision, where it's widely expected we’ll see a downshift to a 50bps rate hike, as inflationary pressures subside.
Europe
There is a concern that Powell may well deliver a hawkish statement designed to push back on market expectations of an imminent softening of the Fed’s position, in an attempt to reset market optimism, which in turn could well put downward pressure on markets overnight.
It's set to be an important 24 hours for equity markets with the Federal Reserve looking to set the tone ahead of tomorrow’s Bank of England, and European Central Bank rate meetings where we’re also expecting to see 50bps rate hikes.
BT shares have received a welcome respite having hit two-year lows yesterday, after announcing a 5-year deal with Nokia to help deliver efficiency improvements, while new pricing for its Openreach unit could help deliver a positive earnings boost.
Even with the rising cost of living some retailers are better able to cope than others with Zara owner Inditex being a case in point, with its shares rising modestly after reporting a solid set of Q3 numbers and outlook. For Q3 sales came in ahead of forecasts, helping to push a rise in year-to-date sales of 19%, and up to €23.1bn, with net profits for the year so far coming in at €3.1bn.
Higher costs have seen gross margins slip back to 58.7%, with Q4 getting off to a solid start with sales up 12%.
On the downside house builders have underperformed after Taylor Wimpey was hit with a downgrade from JPMorgan, on the basis that UK house prices could fall by 10% on the back of weaker demand. Barratt Development shares have also slipped back a touch.
TUI shares have dropped sharply after the travel operator announced it was looking to raise new capital of up to €1.6bn with a view to repaying some of its Covid bailout money. This announcement rather overshadowed its full year numbers which showed that revenues came in at €16.54bn, while losses narrowed to €212.6m from €2.48bn a year ago.
TUI went on to say the economic outlook remains uncertain which could impact on the spending power of its customers, which could lead to slower growth rates and margin erosion.
US
US markets have got off to a cautious start with investors sitting on the side-lines ahead of tonight’s Federal Reserve rate decision. The inability to hang onto the bulk of last night’s gains appears to be down to uncertainty as to whether the dovish interpretation of yesterday’s numbers survives first contact with Powell’s press conference.
Delta Airlines shares have risen after the airline upgraded its Q4 profits outlook to $1.35c to $1.40c as well as upgrading its full year profit guidance to between $3.07 to $3.12c a share. Delta went on to say it expects to see 2023 profits come in between $5 and $6 a share. This improvement appears to have come about from an expected 5% to 7% decline in non-fuel costs, and a 15%-20% improvement in revenues.
Tesla shares have continued to come under pressure after Goldman Sachs cut its price target, sliding to two-year lows, due to concerns over softer demand for its vehicles.
FX
The US dollar has continued to lose ground ahead of today’s Fed meeting, while the euro is edging higher ahead of tomorrow’s ECB meeting where there is some speculation that the governing council might adopt a more hawkish outlook, when it is expected to raise rates by 50bps.
The Japanese yen is currently the main beneficiary of today’s US dollar weakness as it looks to push below the 200-day SMA and head back towards the 130 area.
The pound has edged higher after the latest UK CPI numbers showed that inflation in November rose less than expected, coming in at 10.7% on an annualised basis, down from 11.1%, in a sign that the worst may well be behind us when it comes to higher prices.
While this is welcome news, it is hopefully indicative that inflation could fall further in the coming months, it is unlikely to dissuade the Bank of England from raising rates by 50bps tomorrow, pushing the base rate up to 3.5%. The rebound in the pound in recent weeks will certainly help in keeping a lid on prices, if we are able to maintain those gains, along with the recent falls in oil prices. That doesn’t mean rates won’t continue to rise next year, they probably will, given that inflation is still well over 10%, and 5 times higher than the Bank of England’s 2% target.
Commodities
Crude oil prices have continued their recent rise after the IEA warned that prices were likely to rise next year as sanctions further squeeze Russian supply, and demand starts to pick up as China starts to reopen properly. The delay to the reopening of the Canadian Keystone pipeline is also introducing an upward bias towards WTI.
Gold prices are unchanged ahead of this evening’s Fed announcement, with any hawkish push back on the part of Powell likely to put upward pressure on yields and knock the yellow metal back towards the $1,800 an ounce level.
Volatility
Shares in Tesla saw an active day of trading on Tuesday, with early bargain hunting proving unsustainable and the stock finally trading in a 10% range. One day vol printed 139.39% against 85.75% for the month.
Sticking with big tech stocks and Facebook owner Meta saw its valuation move higher after the market welcomed cost-cutting news in the wake of layoffs. Employee benefits are being pared back and there are also renewed moves afoot in the US looking at a ban on TikTok. That’s lending support for the underlying with one day vol coming in at 105.46% against 62.51% for the month.
That news from Meta combined with an analyst upgrade on Pinterest served to drive action in CMC’s proprietary basket of Social Media stocks. This added 8% at the open and although gains tempered through the session, one day volatility was recorded at 93.69% against 56.9% for the month.
Bitcoin and other digital assets saw prices surge last night, driving volatility ahead of today’s closely followed Federal Reserve rate call. The underlying advanced by almost $1000 at one point, pushing one day vol to 43.66% against 37.69% on the month. Upticks were also seen across the wider asset class.
And a brief, 400-point rally on the Nasdaq 100 ahead of the open yesterday was also sufficient to leave the tech-heavy index as the most active in the asset class. Net gains weren’t sustained but one day vol printed 46.1% against 25.24%, with US equities set to remain in focus as the FOMC meeting looms.
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