After the euphoria of the Powell pivot party on Wednesday we got a wake-up call from New York Fed President John Williams when he pushed back on market expectations of a March rate cut saying it was premature to be even considering anything like that.
Europe
Given the sharp move in bond markets since Wednesday it was perhaps felt necessary to pour a little cold water on the moves of the last 48 hours, with Williams sent out to say it was premature to be thinking in terms of rate cuts. That’s not to say they wouldn’t happen next year but to be pricing in between 5-6 rate cuts next year as markets appeared to be doing seems to be a case of getting a little carried away.
European markets had already been struggling for gains even before Williams comments, with the FTSE100 already in negative territory, with the DAX soon following suit in the wake of those remarks, having initially been trading higher.
The main drag on the UK index has been in the pharmaceutical sector after US Democrat Senator Elizabeth Warren fired a broadside at GSK, AstraZeneca and Abbvie and other drugs companies over what she termed their abuse of patent lockups, urging the FTC to investigate claims that they were serving to drive prices higher and preventing competition. The White House went on to say that as part of any new legislation to make drugs more affordable any pharma companies found to have raised prices more than they should could be forced to pay rebates to Medicare in early 2024.
US
US markets open modestly mixed with the S&P500 slipping lower after New York Fed President John Williams reset market expectations over the timing and the number of rate cuts expected next year, stamping on the idea that we could see a move in March.
On the earnings front Olive Garden owner Darden Restaurants shares have slipped back after reporting Q2 revenue of $2.73bn and profits of $1.76 a share. Looking ahead the guidance for the full year was to expect profits of between $8.75 and $8.90 a share on sales of $11.5bn, with the sales number coming in slightly below what had been expected.
Rivian shares have slipped back after recording two days of strong gains after winning an order from AT&T for a fleet of electric vans.
FX
The US dollar has rebounded against the euro after the latest flash manufacturing and services PMI numbers from France and Germany pointed to Europe’s two largest economies being in recession in Q4.
The disappointing nature of the numbers merely serves to underscore the strange messaging from ECB President Lagarde yesterday when she pushed back on the idea of rate cuts, and that the ECB was data dependent. If that were truly the case then the PMI numbers in the last 3-months ought to be ringing alarm bells very loudly indeed about the state of the eurozone economy.
While the euro came under pressure due to this morning’s weak PMI numbers there was a glimmer of hope for the pound, after consumer confidence saw a modest improvement in December, while services PMI rose to its highest level since June at 52.7, boosting optimism that the UK might be able to avoid a technical recession.
The Norwegian Krone has continued to gain ground after yesterday’s surprise rate hike putting it on course to be the best performer this week, while the US dollar is on course for its worst week since October.
Commodities
Crude oil prices look set to draw a line under 7 weeks of losses with its first weekly gain since October, although not before slipping to a 6-month low earlier this week on concerns that global demand was slowing and that OPEC+ was its limit as far as production cuts are concerned. This is due to US shale producers stepping into the breach with record production output, raising the prospect that OPEC+ producers would end up losing market share if they tried to cut too much.
Gold prices have had a roller-coaster week sliding to a 4-week low before rallying hard on Wednesday in the wake of Fed chair Jay Powell’s dovish comments on US rate policy. While Williams has rowed back on some of that dovishness gold still looks set to finish the week higher.
Volatility
The impact of Wednesday’s policy outlook from the FOMC continued to be felt across markets with the small cap Russell 2000 benefitting from another leg up. The underlying added close on 3% in Thursday’s trade, taking gains for the week to more than 7%. One day vol stood at 37.47% against 21.01% on the month.
That news from the Fed on Wednesday night was also sufficient to give the FTSE-100 a boost and although the position of the Bank of England may not have been quite as accommodating, the London benchmark index made progress over the session, too. Gains were moderated by the closing bell, but the underlying added more than 100 points with one day vol printing 18.26% against 10.89% for the month.
Green tech stocks continued to benefit from that falling rate outlook along with the halo effect of the COP28 summit in Dubai, after that concluded with the aim of transitioning away from fossil fuels. CMC’s proprietary basket of US stocks in the sector posted another day of meaningful gains, adding a further 7% and moving back to levels not seen in three months. One day vol came in at 92.65% compared with 55.57% for the month.
In keeping with a theme from earlier in the week, sugar prices remain very much in focus, having rebounded off fresh multi-month lows on Thursday. Some meaningful support does seem to be building above the 21 cents per pound level. One day vol on the contract stood at 97% against 54.69% for the month.
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