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European stocks tread water, as financials outperform

London skyline in the evening

It’s been a mixed and subdued session for markets in Europe today, with the FTSE100 modestly outperforming due to some modest M&A interest in the telecoms space, and outperformance from financials on the back of rising yields, with Lloyds, HSBC and NatWest all higher. 

Europe

Vodafone shares are higher along with those of Vantage Towers shares are higher, on reports that private equity firms KKR and Global Infrastructure Partners are looking to take a stake in the $13bn Vantage Towers business, of which Vodafone has an 82% stake.

Having slumped sharply over the past couple of days to four-year lows, Ocado shares have enjoyed a modest rebound today with some evidence of bargain hunting taking place given the shares are already down over 60% year to date.

The pain has continued for shareholders of THG this morning after the company issued another profits warning, in the wake of today’s H1 numbers. H1 revenues came in at £1.08bn, an increase of 12.3%, and an operating loss of £89.2m.

THG Beauty contributed to the bulk of the revenue in the first half at £552.8m, an increase of 20% year on year, while Ingenuity saw the biggest percentage increase of 21.4% with £104.2m.

The higher loss was driven by higher operating costs, predominantly in Asia, while gross margins fell to 42.1% from 46.5%. On the outlook, THG was more pessimistic, downgrading its revenue growth targets for this year from 19% to 24% to between 10% and 15%, blaming the higher costs of energy and rising interest rates for the change, sending the shares down to new record lows.

Shell is in focus having announced earlier this month that CEO Ben Van Beurden was going to step down after 40 years at the company, we now know that he will be replaced by Wael Sawan who heads up the company’s gas division at the end of this year.

US

US markets have slipped back on the open after yesterday’s cautiously positive finish, after another fall in weekly jobless claims to 213k, from 218k, and a 3-month low. Retail sales in August painted a more mixed view of the US economy, rising 0.3% in August, however July was revised down to -0.4%, from unchanged, making it the second month this year we’ve seen a negative retail sales print.  

It’s been a choppy couple of months for Adobe, the shares hitting a two year low in June after the company downgraded its Q3 guidance to $4.43bn below expectations of $4.52bn, and a full year forecast of $17.65bn, down from $17.9bn. Despite a modest rally to 4-month highs in August the shares have drifted lower again, bringing those June lows back into focus.

Today’s Q3 numbers came in as expected at $4.43bn, however Q4 guidance came up short, with the company downgrading its outlook to $4.52bn, from $4.59bn In addition, Adobe announced they had agreed a deal of $20bn in cash and stock to buy Figma, a mobile web interface design company, the shares dropping sharply to fresh two-year lows.

Netflix shares have edged higher on the back of a broker upgrade on optimism that its new advertising tier of programming will help underpin its subscriber base.

Railway stocks are also on the up after rail unions in the US agreed a deal with the rail companies to avoid strike action. Union Pacific, CSX and Norfolk Southern have edged higher.   

FX

After a solid performance yesterday, the pound has slipped back despite 12-month inflation expectations rising to 4.9% in August from 4.6% in July, although the 5-year measure slipped to 3.1% from 3.5%, so you pay your money, and you take your choice.

Expectations over next week’s rate decision appear to be leaning towards the central bank raising rates by 50bps for the second meeting in succession, than being more aggressive and going by 75bps in line with the ECB and the Federal Reserve.

It certainly comes to something when the Bank of England is perceived as being less hawkish than the European Central Bank, but that appears to be what markets are pricing, and speaks volumes over how little faith markets have in the Bank of England’s inflation fighting credentials. We also got some hawkish commentary from ECB governing council member Gabriel Makhlouf who is generally considered a “dove” which has also pushed the euro higher.  

The Norwegian Krone is also under pressure on the back of weaker crude oil and natural gas prices, as the EU looks to agree on a price cap with Norwegian gas producers. 

Commodities

Brent crude oil prices are once again on the back foot as demand concerns once again weigh on prices, after the IEA suggested that demand growth could well grind to a halt in Q4. US oil prices are also under pressure, though they should find some support at levels closer to $80 on expectations that the US could start refilling the SPR.

Gold prices have slipped back to their July lows at $1,680 which is currently acting as support as the continued rise in yields erodes the desirability of owning the yellow metal. US 2-year yields are up another 5 bps today and back at levels last seen in 2007, close to 4%.

Volatility

US equity markets are attempting to recover some of the losses picked up off the back of that inflation report, but gains have so far been limited. One outlier however was Netflix, whose stock advanced close to 3% yesterday, driving daily vol to 91.72% against 67.54% on the month in the wake of the company releasing documents relating to its advertising supported tier, news which was evidently greeted with approval by investors.

Some of the more erratic price action we’ve seen in crypto markets has abated, although Dash managed to advance around 4% yesterday, albeit in a slightly choppy fashion. Daily vol here reached 72.58% against 62.29% for the month.

USD/JPY topped out in terms of fiat currency price action, with the pair failing to retest those 24-year highs posted last week. There’s speculation building that the Bank of Japan may intervene in a bid to shore up the Yen and that’s driving price action as a result. Daily vol reached 14.99% against 11.19% on the month.

Finally, whilst crude oil prices are creeping higher, a number of petrochemicals products experienced renewed downside pressure yesterday. Both US Heating Oil and Low Sulphur Gasoil traded down at levels not seen in around five weeks. Heating oil daily vol came in at 69.04% against 50.49% whilst Gasoil printed 71.42% against 53.38%.

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