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European markets rebound as Fed 100bps rate bets get pared back

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European markets look set to finish a negative week on an upswing as investors veer between optimism over a soft landing for the global economy, against concerns that upcoming earnings could well see significant downward revisions.


With two of the most hawkish Fed policymakers pushing back on the prospect of a 100bps rate hike in just under two weeks’ time, the FOMC will want to avoid a repetition of events that took place during the blackout period of the last meeting. This saw the central bank adopt a sharp policy pivot on rates from 50bps to 75bps in a move that saw officials come under fire for tearing up their guidance playbook.

Today’s rebound has been led by the DAX with strong gains for the likes of Mercedes Benz and BMW, while in the UK Aston Martinshares have surged after the business secured a funding deal of £335m from the Saudi Arabia sovereign wealth fund, making it the group’s second largest shareholder.

Rolls-Royce shares are also having a decent day, top of the FTSE100, perhaps due to the upcoming Farnborough Air Show next week, which might result in some decent order flow.     

The impact of Covid restrictions in China impacted on today’s Q1 sales numbers from luxury fashion chain Burberry after they reported an increase in sales of 1% over the quarter, sending the shares to the bottom of the FTSE100.

Without that disruption comparable store sales excluding the Chinese mainland saw a rise of 16%. The business in China saw a decline of 35%, while business in the US also slowed, falling 4%.  

Retail revenue came in at £505m for the 13-week period ending the 2nd July.

Despite being adversely affected by the weakness in China, Burberry said it expects to maintain margins of 20% in the medium term, and to see £90m in adjusted operating profit for FY23.  

Rio Tinto shares have slipped back after warning over the outlook saying that the global economic slowdown could well impact revenues and profits due to lower copper and iron ore prices. Its Q2 production report saw unrefined copper output fall 5.5%, while aluminium production fell 10% year on year. Rio also downgraded its production forecasts for aluminium and alumina.

Soft drinks retailer Fevertree shares have fallen sharply to 6-year lows, after the company warned on full year profits, despite what on the face of it look like a decent set of H1 numbers.

H1 revenues rose 14% to £160.9m with decent gains across all its business areas, maintaining its full year revenue guidance of £355m to £365m.

However, the impact of rising costs is expected to see a slide in gross margins, with the company citing three areas which are expected to see profits come in lower than expected.

Glass availability and costs is expected to cut margins by between 400bps and 600bps, along with a 50% rise in freight costs which is expected to see a reduction in EBITDA to between £37.5m to £45m for the current fiscal year, down from £63m to £66m. Today’s profit warning has seen the likes of Britvic shares also fall back along with Irn Bru owner AG Barr.  


As we come to the end of a negative week for US stocks, US markets have taken their cues from today’s rebound in Europe, opening higher, after a decent rebound in US retail sales, as well as a drop in University of Michigan 5–10-year inflation expectations to 2.8% from 3.1%.  

US retail sales for June rose 1%, beating expectations of 0.9%, with the control group measure rising to 0.8%, after a decline of -0.3% in May. This could be good news for US GDP which suggests that the economy may well avoid a contraction in Q2, and ergo a technical recession. Today’s numbers mean that US retail sales have been positive every single month this year, apart from a -0.1% decline in May.

On the one hand the resilience of these numbers may also give the Fed confidence in moving on a 100bps move when it meets later this month, but the University of Michigan inflation numbers paint a slightly different picture in terms of inflation expectations.

Further comments from St. Louis Fed President James Bullard that he saw little difference between the Fed doing a 75bps move or 100bps, has kept the prospect of what the Fed might do in 12 days’ time evenly balanced.   

Wells Fargo is probably the one US bank that is the best bellwether of the US economy given its smaller investment banking operation, and today’s Q2 numbers paint a mixed picture, which has seen the shares rebound modestly after yesterday’s losses.  

For Q2 revenues came in at $17.03bn and like its peers these came in light, as did profits, coming in at $0.74c a share.

The bank set aside a larger than expected $580m in respect of credit losses, with the bank saying it expects these to increase further. Its investment banking operation also saw a $107m write-down.

Mortgage lending also saw a big drop falling to $287m from $1.3bn in Q1, giving a stark illustration how much damage higher rates have done to the consumer demand for housing. Ordinary loans did see an increase rising to $926.6m, driven by personal and auto loans.   

Citigroup shares fell sharply yesterday as the US banking sector absorbed yesterday’s disappointing Q2 updates from JPMorgan Chase and Morgan Stanley.

Today’s Q2 update from Citigroup has seen the shares rebound after the numbers painted a better-than-expected picture as revenues beat expectations, coming in at $19.6bn, while profits came in well ahead of forecasts at $2.19c a share.

FICC trading saw revenues come in much better than expected at over $4.08bn, raising the question as to whether forecasts were set too low. It's always easier to beat a low bar, with most of the outperformance coming from rates, currencies and commodities trading.  

Investment banking revenue came in short, like its peers with $805m, while the bank has deeper ties in Russia as it looks to extricate itself from its operation there, with losses there expected to be slightly lower, at about $2bn in a worst-case scenario  

The bank set aside $1.3bn in respect of provisions for credit losses, although like its peers, credit card lending rose, as did demand for ordinary loans.


The US dollar has seen another week of strong gains, it has risen for 3 weeks in succession. We do appear to be seeing some modest profit taking heading into the weekend, with the euro looking to retake the 1.0100 area after rebounding from 0.9950 yesterday.

The fall in Michigan inflation expectations has led to some US dollar weakness this afternoon across the board, with the likes of the Canadian dollar seeing a decent rebound on the back of rebounding oil prices. The Norwegian Krone is also getting a bid as well.

The Japanese yen, the pound and the euro have all been amongst the worst performers this week largely on the basis that the markets perceive that the central banks of these three countries don’t have the appetite to raise rates.

As far as the Bank of Japan this is certainly true, while the ECB is hamstrung by politics and fragmentation concerns. The Bank of England has none of these excuses yet is perceived as weak when it comes to its inflation fighting credentials. As a result, the pound is paying the price with markets un-enamoured by the leadership at the top of the MPC, and unconvinced the bank has the mindset to move more decisively and hike by 50bps when it meets at the beginning of August.        


Copper prices have continued to decline this week, down for 6 weeks in a row, and falling to their lowest levels since November 2020, as concerns over short term global demand keep pressure on prices.

Crude oil prices have rebounded today, but are still on course for their fifth successive weekly decline, after hitting their lowest levels since the end of February earlier in the week.  Today’s rally may also be being driven by events in Saudi Arabia with the US acknowledging that President Biden will be able to persuade the Saudis to increase production in an attempt to keep prices down.

Despite the weaker US dollar, gold prices have continued to struggle today, on course to close at their weakest levels since August last year.


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