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European markets slip for the second day in a row, UK gilt yields slide

European markets have continued to lack direction with a slight softish bias, despite the decision by the People’s Bank of China to cut 1- and 5-year lending rates by 10bps. The weakness appears to be being driven by disappointment over the small nature of the move, which has prompted declines in basic resources and the energy sector, with Glencore, Anglo American and Shell acting as the main drags.

Europe

The weakness here is being slightly offset in outperformance in healthcare and consumer staples, with AstraZeneca, GSK and Unilever pushing higher.

On the upside Rolls-Royceshares are higher after new CEO Tufan Erginbilgic said that the company was making progress on the turnaround front, in comments made at the Paris Air show, and that the widebody market was coming back strongly, and that the company would consider a return to the narrow body market if the right opportunity arose.

UK grocery price inflation eased slightly in June; however, it will be small comfort to consumers given it is still an eye-wateringly high 16.5%, with eggs and frozen potatoes showing the biggest increases, according to Kantar. Kantar went on to say that the biggest winners in terms of sales growth were Aldi and Lidl. Tesco and Sainsbury maintained their position as UK’s number one and two supermarkets by market share.

In some modest M&A activity, Lookers, a UK car dealership chain has agreed a sale to Canada’s Alpha Auto Group for the sum of £465m. 

Travel and insurance provider Saga shares are modestly higher after reporting that it expects yearly profits to be well ahead of last year, as its cruise business continues to see improvements in its load factor rates for this year, as well as next year. Travel is also performing well and in line with forecasts.    

US

US markets have returned from their long weekend with a lower open, as doubts start to creep in about the sustainability of the current rally.  With Fed chair Jay Powell due to speak tomorrow, along with a whole host of Fed speakers due throughout the week an element of profit taking appears to be kicking in.

On the earnings front, FedEx is due to report its Q4 numbers after the closing bell this evening having hit 10-month highs at the end of last week. The big question is whether recent share price performance is justified by expectations. The shares have made good gains since the Q3 numbers were published, however the recent improvements in performance have been a case of focussing on costs, which has helped improve profits, but done little to boost revenues, even as the company upgraded its full year earnings forecast to between $14.60 and $15.20 a share, a sizeable upgrade from the previous $13 to $14 range.

FedEx has been focussing on reducing the number of flights, grounding planes, and reducing office space along with the intention to reduce headcount in the US by 25k. Cost savings for Q4 are expected to be in the region of $50m, while in April the company outlined plans to consolidate its express package and ground delivery units in an attempt to make a further $4bn in savings. A dividend hike of 10% was also announced.

Q4 revenues are expected to come in at $22.75bn and profits of $4.89c a share. On an annual basis revenues are forecast to fall from $93.5bn to $90.96bn while profits are expected to fall to $14.86c a share.

FX

The Australian dollar has slipped back after the latest minutes from the recent RBA meeting showed the decision to raise rates earlier this month was a close-run decision, meaning that the bar to further rate hikes is probably a higher one than markets had been pricing. The minutes reduce the likelihood of further rate hikes in the short term, even if they don’t in the longer term. 

The pound has also slipped back, along with gilt yields, which have reversed most of yesterday’s rise after Chancellor of the Exchequer Jeremy Hunt pushed back on the idea of help for under pressure mortgage holders, a move that he described as inflationary. Any such move would also make the Bank of England’s task in tackling inflation much harder, given that it would undermine the very outcome the central bank is trying to engineer, that is a slowdown in demand. That fact doesn’t appear to be cutting much ice with some MPs, who seemingly fail to understand that it is the very fact that governments intervened too much is one of the reasons we’re in the mess we’re in.        

Commodities

Crude oil prices are lower despite China cutting its 1- and 5-year lending rates by 10bps, with the consensus being that the measure won’t make much difference and is mere tinkering around the edges. The weakness in recent economic data is also tempering expectations over the performance of the Chinese economy this year, with Goldman Sachs being the latest to downgrade its expectations for economic output to 5.4% from 6%.

Gold prices have slipped back towards their June lows, with weakness in precious metals more broadly dragging it lower. Silver, Platinum, and Palladium are all down sharply on concerns over the economic outlook, while the strong US dollar is also acting as a drag.   

Volatility.

With US markets closed on Monday, this had a dampening effect on price action across all asset classes with limited levels of volatility being observed. Single stocks however were the stand-out with the 2.3% uptick in UniCredit driving the bank’s valuation close to 12-month highs. It appears that a reduction in short interest in the stock has been observed, with one day volatility coming in at 54.23% against 38.29% for the month.

Shares in Airbus had a good start to the session off the back of a significant 500 aircraft order that it announced at the Paris airshow. Gains however proved difficult to sustain with the stock ending barely ahead. One day volatility sat at 29.24% against 26.71% for the month.

Volatility remains elevated on the Nikkei equity index with some indications that this may now be being driven by a crackdown on some structured products. The index posted a down day on Monday, losing around 1% although remaining close to those highs not seen since 1990. One day vol printed 21.56% against 19.15% for the month.

Elsewhere movement was subdued with the most active fiat currency trade being Euro/Swiss. The cross still remains below parity but continues to appreciate, with attention focused on Thursday’s SNB rate call. Expectations are for a 25bps hike and hints that this will be about all the bank needs to do for now. One day vol on Euro/Swiss sat at 5.57% against 5.12% for the month.

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