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ECB lays out rate hike path, euro slides

Euro symbol

It’s been another weak session for European markets as the early week optimism over the dropping of restrictions in China gives way to the reality that China’s zero-covid strategy will mean that any recovery in the world’s second biggest economy,  will be very much stop-start in nature.

Europe

This has been borne out by the news that some parts of Shanghai will go into a renewed lockdown with a widespread testing program to be conducted this weekend. Coming on top of yesterday’s OECD warning about the wider recovery story, the reality is dawning that any post covid rebound in China is going to be of the long and slow variety.

This is weighing on the mining sector in the form of lower metals prices, which is putting the likes of Rio Tinto under pressure.

The ECB offered little in the way of relief as it outlined plans to hike rates by 25bps in July and September, with the only variable being whether we get a 25bps, or 50bps in September.

Concerns over weak sentiment and high inflation are weighing on the retail sector after disappointing updates from AO World and DFS, with fast fashion retailers ASOS and Boohoo.com falling further out of favour, while Sainsbury and Associated British Foods are trading ex-dividend, along with WPP

With the shares languishing close to one year lows the bar was already low for today’s full year numbers from Tate & Lyle. On revenues there was an 18% increase to £1.38bn, from continuing operations, while pre-tax profits rose 24% to £45m, helping to push the shares higher on the day. For fiscal year 2023 the company kept its guidance unchanged saying that higher prices would offset the impact of increased costs.

There were no surprises in today’s H1 trading update from British American Tobacco with the company reaffirming their annual revenue growth outlook to between 2% to 4%. The company also reaffirmed its ambition to deliver £5bn in New Category revenue by 2025. BAT management also said it was on track to return £2bn to shareholders by way of its share buyback program.

On the plus side, Melrose Industries has continued to build on its gains from yesterday, after the company announced it was buying back £500m of its own shares. 

US

It’s been a slow open for US markets, ahead of tomorrow’s US CPI numbers for May, while weekly jobless claims rose again, rising to 229k and the highest level since the first week in April.

Walgreen Boots shares are in focus after Apollo Global and Reliance Industries made a £5bn bid for the UK Boots operation. Earlier this year it was being reported that Walgreens was looking for a price closer to £7bn, while the deal could prompt the UK government to intervene given how important the Boots operation is to the UK’s health infrastructure. With over 2,200 branches and the various problems facing GP’s and hospitals, any branch closures could be controversial.

In a move that appears to be an attempt to rescue its deal with Elon Musk, Twitter has said it will provide the Tesla CEO with internal data which it hopes will unlock the standoff over how it calculates how many of its accounts are bot or spam accounts.

Tesla shares got a decent uplift from a broker upgrade from UBS as well as a strong rebound in Chinese car production in May. 

FX

It’s been a predominantly risk off day today, with the Japanese yen and Swiss franc outperforming, with weakness in equity markets driving appearing to drive sentiment.

The euro has undergone a choppy session after the European Central Bank indicated that a 25bps rate hike was coming in July, with the prospect of another 25bps move in September, with the optionality of a 50bps move if inflation remains elevated.

This pre-commitment is a first for the ECB and speaks to a central bank that is increasingly split between the more hawkish members of the governing council and those who worry about increased fragmentation risk. This risk is best personified in the spread between Germany and Italy 10 year borrowing costs which moved to their widest levels in over two years.

In the wake of the initially hawkish interpretation of today’s statement, the euro spiked higher before sliding to the lows of the day along with bond markets as spreads widened out.

As expected, the ECB upgraded its inflation forecasts for this year, and subsequent years, while downgrading their growth forecasts.

The Australian dollar has been the biggest faller today on the back of a slide in copper prices amidst concern about how quickly we’ll see a rebound in economic activity in China. Any prospect of a rebound in economic activity will need to be tempered by the inevitability of periodic lockdowns in response to sporadic covid case outbreaks. 

Commodities

Crude oil prices have slipped back from three-month highs on this morning’s reports that Shanghai will go into a renewed lockdown with a widespread testing program to be conducted this weekend. The early week optimism of a Chinese rebound has given way to the realisation that any recovery is likely to be very stop start in nature, given that China is thus far showing little inclination to deviate from its zero-covid strategy. 

Copper prices have fallen back after the initial early week optimism of a China reopening has given way to the reality of fresh lockdown restrictions as new cases flare up again.  

Gold prices are under pressure again as yields once again push higher, not just in the US but across Europe more broadly as the ECB committed to start raising rates in July, followed by another move in September.       

Volatility

The Aussie Dollar has been in focus of late following that slightly more aggressive than expected move by the RBA earlier in the week. What’s more, with a slowing US economy and growth still being seen in Australia, AUD has the potential to find further support in the medium term. Daily vol on Aussie Dollar/Kiwi posted 8.73% yesterday, up from 6.88% on the month, whilst similar price action was seen on Sterling/Aussie, reaching 11.72% on the day and 10.35% on the month.

Natural Gas prices fell sharply yesterday with many eyeing today’s release of inventory data from the US. The market has been very much in focus but the scale of the sell-off seen in US Natural Gas has been eye-catching, with losses exceeding 10% on Wednesday before the sell-off continued overnight. Daily vol on the cash contract hit 107% against 81% on the month.

That more aggressive stance over interest rates at the RBA took a toll on the Aussie share index, too. It’s not all just downside pressure here, either, which is serving to push price action a little, with daily vol on the ASX200 advancing to 17.21%.

Finally looking at single stocks, UK transport operator National Express has been in the spotlight. Shares were rattled on Tuesday by a profit warning and the shakeout has continued, with the stock now down around 20% on the week. Daily vol sat at 186% against 84% on the month.

 

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