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Weaker yields offer a lift as European markets edge higher

European markets have got off to a positive start to the week, helped by a continued decline in bond yields on this side of the Atlantic which have seen further falls in the face of weakening commodity prices and perhaps that we might see a slowdown in the rate hiking cycle, of central banks as growth slows heading into year end.

Europe

UK gilt yields have also continued their recent slide on the news that Rishi Sunak has been confirmed as UK Prime Minister, after his main rival Penny Mordaunt dropped out, making him the third PM in as many months.

ASOS shares initially opened higher after it was confirmed that Mike Ashley’s Frasers Group had taken a 5% stake in the business, as the widely diversified retail business looks to broaden its retail digital footprint. Fraser’s Group also announced that it had increased its stake in Hugo Boss as it looks to construct a retail offering from the bottom to the top of the retail value chain.

Pearson shares have jumped to their highest levels in three years after reporting that underlying revenue rose by 7% in the first 9 months of the year. Their US business has continued to act as a drag with US sales declining 4%. The best performing parts of the business were in assessments and qualifications which saw sales growth of 12%, and English language learning of 28%. The growth in English language was driven by tests taken in India and Australia.

Auto Trader Group is also higher after announcing the sale of Webzone which trades as Carzone in the Republic of Ireland for €30m.

On the downside we’re seeing losses in basic resources and other China related businesses after President Xi’s decision to purge anyone who didn’t share his view of the world inside and outside of China.

With the latest economic data showing a modest improvement on the numbers in Q2, but that the economy is still struggling, the longer-term view appears to be that China’s zero-covid policy is unlikely to be eased and that by surrounding himself with yes men there appears to be little evidence of a change of direction away from a more centralised model when it comes to economic governance.

The biggest losses are in the likes of Prudential, HSBC and Standard Chartered Bank, all of which do large amounts of business in the Greater China region, while in basic resources a more insular China has seen the likes of Antofagasta, Anglo American and Rio Tinto slip back.  

US

US markets have picked up where they left off on Friday, opening higher as they look to build on the big rebound seen last week, however we’ve slipped off the highs of the day on the back of a pickup in US treasury yields, with the US 10 year back above 4.25% again.

On the data front the latest flash PMIs for October showed that economic activity in the manufacturing sector slowed to 49.9, from 52 in September, while in services the economy remained in contraction, coming in at 46.6, down from 47.5.

With all of the weakness being seen in Chinese markets, Tesla shares have slipped back after the electric car company announced that it was reducing the price of its cars in the region, notably the Model Y and the Model 3. These price cuts come on the back of a record month for deliveries in China in September of 83,185.  

We’re also seeing big declines in US listed Chinese stocks like Alibaba, Tencent and JD.com on concerns that the new Chinese government will be much less business friendly, with the Nasdaq Golden Dragon index sliding sharply.

FX

On a day when we heard more reports that the Bank of Japan had intervened to buy the Japanese yen against the US dollar, the greenback still looks set to finish the day higher. While this time the US dollar slipped below the Friday lows, the rebound has been quite sharp suggesting that the Bank of Japan will need to work a lot harder if it wants to prevent the US dollar retesting the highs of last week. The reluctance of the Bank of Japan to alter its policy settings is making its job that much harder and the markets will be keen to test that determination to keep rates low in the face of a currency that is serving as the currency market' s whipping boy.

After testing and failing to break above the 50-day SMA earlier this morning at 1.1410, the pound has slipped back, while the decline in gilt yields is also likely to relieve the pressure on borrowing costs on both short- and long-term measures, we’ve not seen much in the way of sustainable sterling strength, although the technical outlook appears to be much more positive than it was a week ago.

Commodities

Crude oil prices have had another choppy day, initially sliding to the lows of the day on the back of concerns over weaker Chinese demand, despite an improvement in the latest economic data from September, which finally came out earlier today.

Chinese retail sales were disappointing in September rising 2.5%, down from 5.4%, and while industrial production rose by 6.3% the outlook looks challenging. The Chinese economy showed an expansion of 3.9% in Q3, a decent rebound from a -2.7% contraction in Q2. Prices have recovered somewhat in the afternoon session primarily on the back of a weaker US dollar which has slipped back after some disappointing flash PMI numbers for October.

Copper prices have also slipped back on the weaker China demand story.

UK natural gas prices have continued to fall, sliding below the lows in July, and to their lowest levels since the end of June, as continued warm weather in the UK and across Europe serves to keep demand low.  

Volatility

US Natural gas slipped back further during Friday’s session, leading to increased price action for the commodity once again. It now trades down at levels not seen since the end of the first quarter with big storage builds being reported. Although Europe may be facing gas shortages this winter, the problem is moving and housing the product, but at some point, speculators may decide that the price is simply too low. One day vol came in at 77% against 68.05% on the month.

IBM’s stock remained active following the release of earnings news earlier in the week. One day vol on the bellwether tech stock was recorded at 67.78% against 41.49% for the month. The underlying has now recovered the losses accrued over the last six weeks.

CMC’s proprietary basket of future of work stocks – that covers a number of collaborative tech plays like Zoom, Dropbox, Microsoft and Adobe – was also in focus. The fact that the Fed appears to be easing off on the monetary policy tightening agenda is lending a degree of support across the board, with tech stocks – which have had a rough few months – finding some upside. One day vol on the basket came in at 74.19% against 56.25% for the month.

Finally, the Kiwi Dollar, which has been under sustained pressure against the greenback over the last six month found some support running into the weekend break. That softening of heart at the Fed is helping here, resulting in a gain of around one and a half cents on Friday afternoon. One day vol on the pair sat at 23.96% against 19.8% on the month.

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