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Bond yields slide as US economy contracts again

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It’s been a mixed earnings day today for European markets with some good, and some bad

The FTSE100 has underperformed, slipping lower, weighed down by health care, telecoms and banks.

Europe

On the bad, Smith and Nephew shares have plunged after reporting H1 revenues that came in as expected at $2.6bn, and a modest decline in trading profits to $440m. The decline was due to a fall in margins, with the company saying that they expected trading profit margins for the year to fall from 18.5% to 17.5%. This appears to be down to supply chain challenges as well as a higher inflation environment.

BT Group shares are also lower despite reaffirming its full year outlook after Q1 EBITDA came in line with forecasts at £1.9bn. Q1 revenue rose to £5.13bn as the rollout of fibre connections continued at pace, with a record quarterly number of 763k. A 7% fall in revenues in its Enterprise operation appears to have prompted today’s weakness over concerns there could be more weakness to come.   

Barclays latest H1 numbers were also underwhelming, and it’s not hard to see why. Attributable profit for H1 was £2.5bn, down sharply from the same period a year ago, with £1.1bn of that coming in Q2. The bank has had to take a charge of £600m in respect of over issuance of securities, which it has had to buy back.

On the wider numbers investment bank revenue for Q2 came in at just over £4bn, beating expectations of £3.7bn, with FICC seeing a modest slowdown from Q1 to £1.5bn.

Its equity and debt capital markets division has seen a big drop in revenues over the past 6 months, although advisory has performed slightly better in Q2, after a poor Q1.

The UK bank saw a 16% fall in H1 profits from a year ago to £854m, mainly due to last year’s numbers receiving a boost from a loan loss release, while this year included a £48m set aside for loan loss provisions.    

On the wider numbers, operating expenses for this year are expected to rise sharply due to the various litigation costs, pushing the total up to £16.7bn, well above the previous outlook of £15bn. Unsurprisingly the shares have slipped lower on the day, although some of this move lower can be explained by the sharp fall in yields, which is causing weakness in the rest of the sector.

British Gas owner Centrica shares slipped back after an early surge despite reporting a big jump in adjusted operating profit for H1 of £857m, and upgrading its full year guidance. This appears to be some profit taking with the shares already up over 20% year to date. The decision was taken to resume the dividend, with an interim payment of 1p per share. Centrica also said that the old Rough gas storage facility should be ready for use by this winter.

With so much concern about companies cutting back on advertising spend there was a worry that this would also affect more traditional media of TV and radio. ITV’s H1 numbers appear to bear this out, fortunately a decent performance from ITV Studios has helped to offset this.

Total H1 revenue rose to £1.99bn, helped by a 16% rise in ITV Studios, while total advertising revenue rose 5% over the first half. The number for advertising is slightly misleading in that it disguises a drop of 5% in Q2, and a prediction of a 9% decline in July and an 18% decline in August. The company did say that by the end of September TAR is expected to be broadly flat compared to 2021.

It’s been a good day for Shell after the oil and gas giant reported another record quarter. On an underlying basis Q2 adjusted profits more than doubled from a year ago to a new record of $11.47bn, pushing H1 profits to $20.6bn. This inevitably raises the question as to whether Shell can continue to maintain this level of profitability in the second half of the year? The company also announced another $6bn in share buybacks, while the dividend was kept unchanged at $0.25c a share.

US

After a strong finish for US markets yesterday on the back of last night’s Fed decision we’ve seen a slightly firmer open, after US Q2 GDP came in at -0.9% meaning that in pure economic terms the US economy is in a technical recession. The decline in output was characterised by sharp falls in inventories and gross private domestic investment, which appear to have been hobbled by sky high inflation.    

With weekly jobless claims continuing to edge higher and at 8-month highs, markets appear to be pricing out Fed rate rises beyond the end of this year, with treasury yields dropping sharply, and the US 10-year yield falling to its lowest level in 3 months. Given Powell’s comments yesterday that the Fed is data dependent on future rate rises, then further deterioration in the data could well see further declines in US yields.  

There appears to be little evidence that the slowdown in quarterly revenues that has marked the last few earnings announcements for Facebook is showing signs of slowing, with Meta shares lower today, reversing some of yesterday’s gains. In Q1 Meta lowered revenue guidance to between $28bn and $30bn, while profits fell short in numbers issued last night.

While revenues fell marginally short of the median at $28.82bn there appears to be little sign of a pickup as the company projected Q3 revenue to come in between $26bn to $28.5bn, well below what was being priced by the markets. The company isn’t being helped by higher costs which are expected to come in between $85bn to $88bn in 2022. This is down to its new Reality Labs unit which lost $2.8bn during the quarter and is developing its virtual reality and metaverse offering.

Over the last two years Pfizer revenues have surged due to its role in the rollout of the covid-19 vaccine it developed in conjunction with BioNTech. Full year revenues are expected to rise to a record $102bn this fiscal year, helped by the company raising its prices, with over half of that sum expected to come from its new Covid pill as well as the vaccine, to the tune of $54bn. In Q1 revenues came in at $25.66bn, with vaccines making up $14.94bn of that sum. Today’s Q2 numbers have seen revenues rise to $27.74bn, $16.97bn of that being coming from the vaccine and covid pill, the covid pill making up $8.12bn of that total, almost half. Pfizer reaffirmed its revenue guidance, but upgraded the lower end of its EPS guidance to $6.30 to $6.45c a share.     

After the bell we have the latest numbers from Amazon and Apple and any disappointment here could well upend the recent rebound. The decision by Apple to offer discounts in China on its highest spec iPhone 13 raised more than a few eyebrows a few days ago, and raised the prospect that more could be coming in markets that are starting to struggle. Apple is expected to deliver Q3 revenues of $83bn, a sharp drop from Q2’s $97.3bn, with the disruption in China due to covid restrictions expected to cost the business up to $8bn. During Q2 Apple iPhone sales made up $50.57bn, services $19.82bn and Mac products of $10.43bn.

Amazon’s Q2 numbers will be closely scrutinised for growth in its cloud division AWS, as well as evidence that it might be starting to suffer from similar problems to Walmart, with respect to shrinking margins and rising costs. We know costs have been rising, last year Amazon spent $445bn, up from $363bn in 2020. For Q2 Amazon said it expects to see revenue come in between $116bn and $121bn. This was below market consensus 3 months ago so it will be interesting to see how they guide for Q3. They’ve also been ploughing billions into content for their Prime Video platform in the form of extra sport, as well as the new mini-series “The Rings of Power”, a Lord of the Rings prequel, which has prompted them to raise prices for the first time in several years.

US retailer Best Buy is also lower after following in the footsteps of Walmart by cutting its sales and profit outlook for this year. Comparable sales are expected to fall by 13% in Q2 and 11% annually, with the company saying it would pause its buyback program.       

FX

The US dollar has proved to be fairly resilient today despite the US economy contracting for the second quarter in succession, thus putting the US economy into the realms of a technical recession, despite a still fairly robust labour market. A -0.9% contraction was driven by a fall in inventory and business investment.

The Japanese yen has been the biggest beneficiary of the move lower in US rates as the divergence trade between US and Japanese interest rates sharply unwinds.

The Swiss franc has also gained after the Swiss National Bank said it retains the option to intervene between meetings if it feels it needs to do so to support the currency.  

Commodities

Gold prices have seen a big move higher on the back of the weaker US dollar, in the wake of last night's Fed meeting, and today’s surprise Q2 contraction in the US economy, and higher weekly jobless claims numbers. The slide in yields is also proving to be supportive, pushing the gold price up towards the $1,760 area and a three-week high.  

The weaker US dollar initially provided an uplift for oil prices, along with yesterday’s bigger than expected 4.5m fall in weekly inventories, however this afternoon’s news that the US economy contracted by -0.9% in Q2 has pulled prices off their highs of the day, as demand concerns resurface.    

Volatility

The 75bps hike in rates may have been expected but the accompanying dovish statement from the US Federal Reserve during yesterday’s session caught the market off guard and saw the overbought Dollar give back some ground against many major pairs. The Aussie Dollar is now threatening to break back above 0.7 for the first time in around six weeks, with AUD/USD posting daily vol of 16.67% against 13.26% on the month. GBP/USD wasn’t far behind either, coming in at 14.49% on the day versus 11.42% on the month.

Ethereum Classic is once again dominating the digital asset space, with the token adding a further 25% against the US Dollar during Wednesday’s trade. There’s a network upgrade planned for September and this fundamental innovation appears to be driving interest. As a result of those gains, daily vol came in at 167% against 107% on the month.

News that an activist shareholder is building a stake in PayPal drove interest in the stock yesterday. That was played out in CMC’s proprietary basket of mobile payments companies, which gapped higher at the open then had a turbulent run higher through the day. Daily vol here printed 58% against 45% for the month.

Finally, that statement from the Fed last night also drove interest in precious metals, most notably silver. The underlying added around 3% during yesterday’s trade as prices started advancing away from multi year lows. Daily vol came in at 34.94% against 29.94% on the month.

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