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Soft services PMIs weigh on markets ahead of FOMC minutes

A soft lead from Asia markets and a bigger than expected slowdown in Chinese private sector services activity saw European markets open lower this morning.

Europe

These slowdown fears have been magnified further with softer than expected European services PMIs which have fed into increased slowdown worries, as well as rising interest rate risk, which has fed into weakness in basic resources, energy and financials weighing heavily.

The biggest drag on the FTSE100 has been Shell and BP in terms of points, however the weakness has been broad-based with Ocado the biggest faller on the back of profit taking, having seen the shares rise by over 60% in the past month.

SIG, a company that is a key supplier to the building industry has seen its shares plunge to 6-month lows after warning that profits for the full year are likely to come in at the lower end of expectations. The company which supplies thermal insulation, dry lining, exterior roofing products amongst a variety of others said that H1 revenues came in flat compared to last year, at £1.42bn, with higher prices offsetting a fall in volume. Demand in Germany and France has been particularly weak in the last 2 months. Underlying operating profit expected to be £33m for H1. Today’s warning has translated into some weakness in the likes of Travis Perkins, Howden Joinery, Wickes, and B&Q owner Kingfisher.

On the plus side AO Worldshares have got a lift after reporting full year profits before tax of £7.6m, despite a 17% decline in revenues to £1.14bn. A sharper focus on cost reduction has helped the company achieve this turnaround and has helped restore investor confidence to the point that in June Mike Ashley’s Fraser Group acquired a 19% stake in the business at 68p per share. Looking forward the company said its main focus now is to achieve an EBITDA margin of 5%, it is currently 4%.

Pearson is also higher on the back of an upgrade to buy from UBS, who have suggested that the threat of AI to its business model has been overstated.

US

US markets returned from their 4th July holiday, opening lower with the weak lead from Asia and Europe weighing on sentiment.

Investors are waiting on the release of the Fed minutes later this evening, which may offer up further clues as to the Fed’s thinking when it comes to why they think that two more rate hikes at the very least will be needed by the end of this year.

Rivian shares have continued their gains from last week, and on Monday rising strongly for the 6th day in a row, towards its 200-day SMA, after announcing it was starting deliveries to Amazon for its European operations in Germany.  

Nikola shares are down after reporting that, despite higher deliveries in Q2, production fell from 63 trucks in Q1 to 33 in Q2.  

Netflix shares are modestly higher, rising to their highest levels since January 2022 on the back of a broker upgrade from Goldman Sachs from sell to neutral.  

FX

Weakness in commodity prices is weighing on the likes of the Australian and Canadian dollar, while there has been little movement anywhere else with the euro and the pound broadly treading water around 1.0900 and 1.2700 respectively.

Higher UK rates appear to be offering a modicum of support to the pound with the UK government having to pay 5.67% to borrow £4bn for the next 2 years at an auction of gilts earlier today. There has also been increasing speculation that the Bank of England may have to push rates above 6.5% to bring inflation under control, after this morning’s UK PMI numbers showed that rising wages were adding to higher costs even as input costs slowed. This comes across as overly excessive even with current levels of inflation, and would be enormously counterproductive. There is already plenty of evidence that shows disinflation is in the pipeline, which should help bring prices lower all on their own with rates at current levels.       

Commodities

Despite this week’s pledge to cut output by Saudi Arabia and Russia oil prices are struggling to go anywhere, caught in a pincer movement of demand concerns due to slowing economic numbers, being offset by the fact that the US will look to refill its reserves on any move significantly below $70 a barrel.

Gold prices have continued to edge higher, on course for their 5th day of gains with some modest US dollar weakness helping to lift prices to 1-week highs.

Volatility

With US markets closed on Tuesday for the Independence Day holiday, volatility was thin on the ground given the number of instruments simply not being traded during the session. Cairn Homes was however something of an outlier after a number of sector peers saw target price downgrades from brokers. Whilst this didn’t directly implicate Cairn and the builder’s focus on the booming Irish housing market was also reflected in earnings news this week, the stock still ended up under pressure. One day vol stood at 70.36% against 59.3% for the month.

AstraZeneca also saw elevated levels of price action after the stock looked to claw back some gains following those hefty losses at the start of the week. The impact of any bargain hunting ultimately was rather muted but this was still sufficient to drive the daily vol print to 34.42% against 31.12% for the month.

The Aussie Dollar found itself in focus, with the RBA’s rate call driving some activity here. Opinions have been divided as to whether the Reserve Bank would look for another hike in rates this month, so the decision to hold initiated a degree of Aussie dollar weakness. A notable, albeit brief, spike on AUD/GBP was sufficient to drive price action on the cross. One day volatility sat at 9.64% against 8.4% for the month.

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