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Soft US CPI sends markets soaring

European markets spent most of the day trading cautiously until this afternoon’s US CPI numbers for October unexpectedly came in well below expectations, falling to its lowest level since January.

Europe

The market reaction to the sharply lower inflation number was instant and sharp, as equity and bond markets both rallied hard, with bond yields falling sharply.

If you’re of the mind that falling inflation will temper the size of future rate rises from the Federal Reserve, then this report is for you and markets are reacting on that basis, with bond yields falling sharply in anticipation of a slower pace of Fed rate rises.

The only word of caution is that today’s CPI is but one number, albeit an encouraging one, raising the prospect that central banks may not have to go as hard on inflation as had been initially feared, which means rates may peak at a much lower level. Now we need to see further evidence in subsequent data for this rebound to stick.

The German DAX has soared, pushing well above its 200-day SMA and up to 5-month highs, while the FTSE100 has similarly pushed higher, as it looks to close in on the peaks seen in September.

Medical services company ConvaTec has seen its shares rise strongly after reporting a solid performance year to date, boosting its full year guidance after seeing a 2.4% jump in revenue year to date. Guidance for full year revenue growth has been raised to between 5 4% to 5.8% from 4% to 5.5%.   

Centrica shares are also doing well after the British Gas owner announced a share buyback program, while also upgrading its full year guidance for full year adjusted EPS towards the top end of analyst expectations.  

National Grid shares edged up to their highest levels since September after announcing a 50% increase in operating profits before tax to £2.2bn, which was primarily driven by the sale of NECO earlier this year. The company also upgraded their full year EPS guidance, for 2022/23 to between 6% to 8%. They also upgraded their capital investment target to £40bn, up from £30bn-£35bn.

On the underlying numbers the biggest jump in profits came from UK electricity distribution, which jumped from £257m to £579m, although this was driven by the acquisition of the UK’s biggest electricity distribution last year

AstraZeneca shares have pushed higher after raising its profit guidance for the year, as well as returning to profitability during Q3.

Q3 revenue rose by 11% to $10.98bn, driving year to date revenues up to $33.14bn, with the addition of the Alexion business also helping to drive the improvement. Q3 profits came in at $1.67c a share with growth across all of its business areas helping to drive the improvements.  

Since its launch on public markets in July it’s been a rocky start for Haleon, the consumer business that was spun out of GSK, and which saw GSK management reject a £50bn bid by Unilever earlier this year. It was clear then that decision was likely to prove an expensive mistake and so it has proved, with the shares trading at half that valuation now, and well below their IPO price of 330p.

The shares fell as low as 244p in September over concerns about litigation with respect to Zantac, an antacid drug, which is said to cause side-effects. Management has pushed back on the idea that they should shoulder liability over the antacid drug.

In their second update since their IPO Haleon has delivered a solid set of Q3 numbers, as well as raising their full year guidance. Reported revenues rose 16.1%, as well as a 12.2% rise in reported operating profit of £569m, while full year organic revenue growth is expected to rise between 8% and 8.5%

The quarterly outperformance was driven primarily by sales of cold and flu remedies, however despite raising prices, margins slipped 70bps to 19.7%, and this could well explain why the shares have slipped back, after initially popping higher.

Another big faller is B&M European Retail after reporting a 1.8% increase in H1 revenue to £2.3bn, and a 16.7% fall in statutory profits. EBITDA margin also fell 240bps to 10%, raising concerns that the second half of the year might see a bigger fall as the economy continues to slow.  

US

US markets opened sharply higher after US CPI for October came in at 7.7%, below expectations of 7.9%, while core prices also dropped sharply from 6.6% to 6.3%.

If you’re of the mind that falling inflation will temper the size of future rate rises from the Fed, then this report is for you. Markets are reacting on the basis, with bond yields falling sharply in anticipation of a slower pace of Fed rate rises. The Nasdaq 100 is leading the surge higher with big cap tech stocks roaring higher, led by the likes of Amazon, Apple, Tesla and Meta Platforms.

Having hit a record low earlier this year Rivian shares have stabilised over the last few months, despite yesterday’s sharp declines, and have rebounded strongly in early trade today.

Over the past few months, the business has started to add capacity to justify all the hype that accompanied its IPO at the end of last year, as it comes up to the one-year anniversary of its IPO.

At the end of Q2 the company was showing signs of progress, producing 4,401 vehicles and delivering 4,467 of them, while affirming its 2022 production target of 25k.

To hit that target the performance in H2 would need to be of much greater scale than has been the case so far. On that, Rivian appears to be doing the business, producing 7,363 vehicles during Q3, delivering 6,584 of them.

This put its total production year to date to over 15k, which means Q4 will need to deliver at least 10k vehicles to meet its target. The addition of a second manufacturing shift at Normal should go some way to help achieve that, and will need to be given that the company has 114k pre-orders. Q3 revenues fell slightly short of expectations, coming in at $536m, while the net loss for the quarter was $1.7bn, or $1.57c a share.  

Full year losses are still expected to be in the region of $5.4bn, and while it still has plenty of cash, the rise in costs is likely to be a problem unless they look at raising prices in the months ahead. Losses are expected to come in at $1.86.  

The likes of Coinbase and Robinhood are seeing gains in the wake if the FTX meltdown, with the Robinhood CEO Vlad Tenev saying that the company has seen its best crypto inflows ever, with the various coins also seeing a rebound across the board, with the likes of Solana outperforming after falling equally as heavily yesterday.  

It’s hard to believe that two years ago Beyond Meat shares were trading well above $200 a share, after IPO’ing at $25 in May 2019. Yesterday the shares closed at a new record low as the air continues to hiss out of the plant food bubble. Last night’s Q3 numbers saw net revenue of $82.5m, slightly above expectations, but still over 20% below last year’s levels.

Losses also came in higher than expected at $73.8m, as the company cut prices in order to shift its product. At a time when consumers are feeling the pinch from the rising costs of living, it would appear that trying to save the planet comes with a price tag that either consumers can’t pay, or aren’t prepared to pay! Who knew!

FX

The US dollar has fallen sharply across the board after US CPI fell sharply in October, and by more than expected, fuelling a sell off that has seen the Japanese yen move through the 145.00 level and below the 50-day SMA, which could well see a sharp sell-off towards the 140.00 area.

The Bank of Japan must be quietly pleased with today’s US CPI print as it makes their job of pushing the yen higher easier.

The pound has also surged higher benefitting from today’s US dollar sell-off helped by the overwhelming negativity surrounding the pound ahead of next week’s fiscal statement from the Chancellor of the Exchequer. It has not only rallied against the US dollar, hitting its highest levels since 13th September, but it’s rebounded against the euro as well.

The slide in the US dollar has also helped the euro, pushing it back towards its September highs and a possible test of 1.0200.     

Commodities

The slide in yields has seen gold prices continue their recent break higher, pushing the yellow metal to two-month highs and a possible test of the $1,800 level, and the August highs. For this to happen we would need to see further evidence of a decline in inflation, and, or a slowdown in the pace of Fed rate hikes. We’ve already heard from Charles Evans of the Chicago Fed that he thinks it's time to slow the pace of rate hikes. He surely can’t be the only one who is leaning in that direction, and his comments are a contrast to his comments a month ago when he was much more hawkish.

Despite the weakness in the US dollar, oil prices haven’t seen much of a benefit with the main drag continuing to be the prospect of prolonged covid restrictions in China. Markets can speculate about a relaxation of restrictions all they like, but the reality on the ground is the opposite and likely to remain so until the end of Q1 next year.  

Volatility

Green energy stocks found an element of support during yesterday’s session, arguably off the back of a better-than-expected run for Democrats as results from US mid-term elections continue to trickle in. That drove some elevated activity across the sector, something that was reflected in CMC’s proprietary basket of renewable energy stocks. One day vol printed 73.45% against 65.11% on the month.

Crypto price action remained sharply elevated on Wednesday, with Solana again proving to be something of a stand out. The near collapse of the FTX exchange remains a key driver here along with falling NFT demand and the underlying Solana price fell as much as 60% from the weekend’s highs. One day vol on the currency hit 462.75% against 151.91% on the month.

Ongoing forecasts of mild weather are keeping a lid on natural gas prices, which sold off again on Wednesday, returning to one-week lows as a result. The underlying has been trading in a range of as much as 20% in recent days, but daily volatility came in at 96.26% against 76.32% on the month.

Activity across fiat currencies and equity indices however was recorded as being noticeably subdued. That may persist until the final details of the US midterm elections have been counted and there’s consensus on what might happen next in Washington.

 

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