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European markets edge higher, as hawkish Powell boosts the US dollar

Having stopped the rot yesterday, ending a six-day losing streak, European markets have pushed on today with another positive session, although basic resources have underperformed, due to lower copper and metals prices.

Europe

The DAX has looked to retest the 16,000 level, while the FTSE 100 has looked to regain a foothold above 7,500. 

On the upside Sage Group is outperforming after an upgrade by JPMorgan which said it expect the company’s US business to drive a 10% increase in organic revenue growth.

There’s been little movement in the share price of UBS after it announced plans to cut more than half of Credit Suisse headcount, as it looks to integrate the bank and eliminate overlap in the various roles.

Ocadoshares have taken a tumble on reports that Amazon has denied it is about to make a bid for the business. The shares have rallied strongly in recent days in anticipation that something might come out of the woodwork, and while there may be a kernel of truth behind them there are also practical issues that could prove problematic. 

Ocado has a variety of deals with other big retailers, the likes of Kroger’s in the US, Carrefour in France, and Sobey’s in Canada, while Marks & Spencer could also have a part to play given its 50% stake in Ocado Retail. How would any deal go down with any of these retailers who have partnership deals with Ocado, and there is also the prospect that the CMA might have something to say about any possible deal.  

US

US markets opened slightly lower after yesterday’s advances gave way to some modest profit-taking, as well as caution after Fed chairman Jay Powell warned that several more rate hikes could be expected in the coming months, in comments made in a ECB panel discussion in Sintra.

Nvidia shares along with Advanced Micro Devices shares have opened lower after media reports that the US government is looking at new restrictions on exporting AI chips to China. Given recent concerns over intellectual property it’s a little surprising that investors were caught out by this. This is a key area where the US has an advantage, and it would be surprising if there weren’t more safeguards around this type of technology.

Micron Technology is also lower over concerns that China might look at retaliating given Micron has already fallen foul of China regulators, after the company was banned from key infrastructure projects.

Pinterest shares have risen to one-month highs after being upgraded by Wells Fargo with the bank citing the positive effects of the recently announced Amazon deal, which is due to go live in Q4.      

FX

The US dollar is the best performer, after Fed chairman Jay Powell said that more rate hikes were coming, including the possibility of rate rises at consecutive meetings if the data supported such an action. The strength of the US labour market appears to be behind the hawkish tone, even as headline inflation continues to slow down.

Even with the Japanese yen trading at record lows on a trade weighted basis there is thus far little sign that the Bank of Japan is inclined to arrest this weakness in the form of intervention currently. The focus continues to be on the rate against the US dollar, but it is already at record lows against the Swiss franc, and multiyear lows against the pound and the euro.

The Australian dollar is one of the worst performers sliding sharply in the aftermath of a weaker than expected inflation print for May, which showed that CPI fell -0.4%, while on an annualised basis, prices rose 5.6%, a sharp slowdown from 6.8% in April.

With the RBA having been forced to restart raising rates a couple of months ago this lower-than-expected number may have taken the pressure off with respect to adding another 25bps rate hike next week. With a cash rate already well below its peers at 4.1%, today’s reading may not be enough to prevent that, but it could mean that the eventual terminal rate may well be lower in the medium term.  The pound has also underperformed sliding below last week’s lows as the failure to retest the recent highs has seen gravity take over and could see further weakness towards the 50-day SMA at 1.2550.

Commodities

Crude oil prices have slipped back towards this month’ s lows, with the stronger US dollar acting as a drag, although with concerns about demand still front of mind, there are relatively few positive drivers for oil at the current time. The latest API inventory data did show a modest decline of 2.4m barrels, while EIA inventories showed a draw of -9.6m, however the prospect of higher rates going forward appears to be the foremost concern for now.

Gold prices have continued to look heavy, sliding to 3-month lows, despite slightly softer yields, with the strength of the US dollar probably acting as a drag.

Volatility

A broker downgrade for BT Group saw the company’s stock rattled in early trade on Tuesday. The news was sufficient to drive price action in the large cap meaningfully higher, with one day vol coming in at 61.3% against 43.82% for the month.

CMC’s proprietary basket of European banks found favour on Tuesday, with heavyweight Santander leading the way. The underlying added around 1.6%, doubling the gains seen in the week’s opening session. One day volatility printed 35.07% versus 30% on the month.

Cryptos remain in focus and while bitcoin may be struggling to remain clear of the $30,000-mark, bitcoin cash remains rather more buoyant, continuing its path higher. One day vol on bitcoin cash against the greenback sat at 126.85% versus 85.83% for the month.

Softening demand and further signs that Brazil will produce a decent harvest helped sugar prices extend their downside on Tuesday. The underlying has now dropped close on 10% over the last week, falling to levels not seen since early April as a result. One day volatility printed 68.14% against 43.99% for the month.

And Switzerland’s SMI equity index saw some significant gains in after-hours trade on Tuesday, recovering losses accrued at the end of last week. This may reflect some support the heavyweight pharma play Roche has been finding. One day vol on the SMI hit 20.4% against 12.32% for the month.

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