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European stocks roll over as rising Covid cases prompt new lockdown concerns

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European stocks have been altogether more resilient this week, with the DAX and CAC 40 once again setting new record highs today, however we have slid back heading into the close, after US markets rolled back after initially opening in positive territory.

Europe

Talk of tighter covid restrictions being rolled out incrementally across Europe appears to be tempering risk appetite, over concerns of lower demand heading into the winter months.

The FTSE 100’s struggles have continued today, this time feeling the effects of GlaxoSmithKline going ex-dividend, while weakness in BP and Royal Dutch Shell, due to the slide in oil prices overnight, which has acted as another significant drag on overall sentiment.

Wider concerns about enduring inflation also appear to be limiting the appetite for further strong gains, even as bond yields also slip back from their recent highs.

Royal Mail shares are the best performer today, after delivering a nice £400m windfall for shareholders in the form of a £200m share buyback and a £200m special dividend, alongside an interim dividend of 6.7p per share. There wasn’t much to dislike about today’s update either, with revenues rising by 7.1%, to £6.07bn, the company saying that increasing automation was keeping costs down. This was even after having to account for having to absorb an extra £73m during H1, and an extra £90m next year, £50m of which will come from extra NI contributions.

House builders are also showing a bit more resilience today, with Persimmon and Taylor Wimpey leading the way after sector peer Crest Nicholson said that its full year profits would be marginally ahead of consensus after a strong H2 sales performance. This comes across as a little bit after the fact given that we got some decent trading updates last week from both, with both companies saying that they expected to deliver on full year expectations, which investors acted rather ambivalently to. Better late than never I suppose.

Metro Bank shares have plunged after it agreed to terminate its takeover talks with US private equity firm Carlyle. It’s been a tough couple of years for Metro Bank after its shares plunged in 2019 due to an accounting issue that saw a clear out in its management team, with the new bosses struggling to turn the bank around. Whatever the rationale behind the termination of the talks it seems apparent that there were significant differences over how to take the talks forward. Given the high returns expected by private equity perhaps the price being asked by Metro was too high.   

US

US markets initially opened higher in early trading after weekly jobless claims came in at 268,000, a slight reduction from last week's revised 269k, while continuing claims fell again, dropping sharply from 2.2m to another post pandemic low of 2.08m.

The latest Philadelphia Fed business index also showed a strong performance, rising to its best levels since April in November however this hasn’t been enough to stem the weakness in early trade, although the Nasdaq is outperforming.   

Nvidia shares continue to go from strength to strength, hitting new record highs in early trading after it blew through Q3 expectations on revenues and profits, while posting a bullish outlook for Q4. Revenues came in at $7.1bn, a rise of 50% on a year ago, helped by huge demand for its graphic cards, as well as a huge jump in demand for its data centre services. A 55% rise in sales of high spec chips for AI tasks saw revenues in this growing area of the business rise by over $1bn to $2.9bn.

The selloff in Rivian Automotive shares has continued today, opening over 5% lower, and Lucid Group shares are also under pressure again after retesting its highs from earlier this year. Are markets finally waking up to the fact that valuations that are in line with the likes of Volkswagen and Ford are wishful thinking when neither company has any revenues to speak of.

FX

It’s been a bit of a mixed bag for the US dollar today, with the euro rebounding from a sixteen-month lows yesterday. The pound is holding its ground near 20-month highs against the euro ahead of October retail sales tomorrow, while it has also found it difficult to crack the 1.3500 area.

With a raft of Fed policymakers due to speak in the next 24 hours and the US dollar at sixteen month highs, we’re seeing a little bit of US dollar profit taking, as we gear up for comments from the likes of vice Chairman Richard Clarida, and Christopher Waller from the board of governors, as well as Charles Evans of the Chicago Fed and Mary Daly of the San Francisco Fed. This will determine whether they are all leaning towards the position adopted earlier this week by St. Louis Fed President James Bullard, who suggested that with the acceleration in US inflation the Fed needed to be more hawkish and look to accelerate the taper program when they meet next month.

Commodities

Crude oil prices hit six-week lows earlier today on expectations that the US, China, and Japan might come together to try and drive prices lower by way of a joint SPR release. We’ve seen a little bit of a rally off the lows, but it’s significant that Brent prices did briefly slip below $80 a barrel. If sustained, the recent weakness in crude oil prices could well translate into the fourth successive weekly decline.

Gold prices are also seeing a little bit of a pullback as the next policy response from the Fed becomes ever more shrouded in uncertainty ahead of the next meeting in December. With all the concerns about upward pressure on inflation there is a train of thought that the Fed might have to taper faster in order to try and stop from falling further behind the curve on inflation.


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