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Yields push higher as markets go cold on early rate cut bets

The weakness we saw in European markets yesterday has carried over as the continued pushback on rate cut expectations from central banks has served to boost the US dollar as well as undermine confidence in risky assets, as concerns over the economic outlook grow.

Europe

The prospect that rate cuts may well come much later in the year has seen yields rebound from their recent lows, while sending the FTSE 100 to one-month lows. The main drag on the UK index from a points point of view is AstraZeneca after Swiss bank UBS downgraded the shares to sell with the bank warning that its oncology portfolio in the US could be subject to a 20% price cut in 2025 due to US Medicare reform.

The biggest faller today is property portal site Rightmove after JPMorgan Chase cut its rating to underweight citing the risks of the recent tie-up between OnTheMarket and CoStar which the bank warned could impact on its future revenue and profits growth.

Ocado shares had a roller-coaster year in 2023, as speculation over bid talk during the first half pulled them off their lows of last year, before sliding back from the highs on pessimism about whether the business would ever turn a profit. Today’s Q4 trading statement has shown a better-than-expected increase in retail revenue of 10.9% to £609.4m, up from a 7.3% increase in Q3, helped by a record Christmas trading performance, pushing the shares higher on the day.

Volumes also saw an increase of 4.8% with the average basket value rising 3.8% to £120.62. Full-year revenues saw a 7% increase to £2.36bn, helping the business to return a positive full year EBITDA. For 2024 Ocado was cautious on its guidance, saying that revenue growth was likely to be impacted by lower growth in average selling prices, while making progress on improving efficiency to push EBITDA into mid-high single digits.  

Vodafoneshares have seen little to no reaction from the company’s announcement that they have penned a 10-year deal with Microsoft to integrate generative AI into its services to its 300m customers. The deal will cost $1.5bn with Vodafone looking to incorporate AI solutions into its services while Microsoft will use Vodafone’s fixed and mobile connectivity services.

US

With central banker’s keen to push back on rate cut talk, US markets have returned from their long weekend and taken their cues from today’s weak European session and opened broadly lower across the board, although an absolutely stinker of an Empire Manufacturing survey for January did briefly temper some of the upside as far as yields are concerned.

Empire manufacturing came in at -43.7 in January as new orders collapsed to -49.4, however while current conditions painted a sharp slowdown the forward-looking indicators all improved, and it was particularly notable that prices paid saw a sharp increase on both current and forward indicators. 

Tech is leading the weakness with Apple shares lower after the company announced price cuts on its phones in China to try and stop the haemorrhaging of sales to Huawei’s new 5G phone. Tesla shares are also lower after CEO Elon Musk, said that he would look to build AI and other robotics products outside the company unless his stake in the business was increased to 25%, from the 13% he currently has now.

On the earnings front we have the latest Q4 numbers from Goldman Sachs and Morgan Stanley. Up until October the Goldman Sachs share price had struggled before a strong end of year rebound which has seen the shares rally to within touching distance of its 2022 highs. The first 3 quarters saw it finally saw it finally complete the process of offloading its retail GreenSky operation to a private equity group, taking a sizeable write-down in the process.

Today’s Q4 numbers have seen total revenues beat forecasts at $11.32bn, however there was some notable misses. FICC sales and trading revenue came in at just over $2bn, over $0.5bn short of estimates, although that was offset by a sizeable beat on equities trading which came in at $2.61bn, over $0.3bn above estimates. The advisory business also beat forecasts, while net interest income came in at $1.34bn, which was lower than forecast. Profits were also solid coming in well above forecasts at $5.48 a share.  

Morgan Stanley’s numbers today bring the curtain down on the James Gorman era who is being replaced by Edward “Ted” Pick as CEO. In their Q3 numbers there were some notable misses with wealth management falling short of forecasts. Today’s Q4 numbers have seen total revenues come in at $12.9bn with the wealth management shrugging off the weakness in Q3 by beating forecasts with $6.65bn in revenues.

Profits on the other hand were lower than expected at $0.85 a share due to one-time higher costs, from FDIC special assessment charge of $286m, and other expenses which were above forecasts. Full-year revenues rose to $54.14bn, while net income was lower to the tune of $1.9bn, at $9.1bn.

FX

The pound has slipped back largely because of a stronger US dollar even as wage growth for the 3 months to November slowed to 6.6% from 7.2%. This will be welcome news for the Bank of England who will want to see this trend continue, but it is also welcome news for UK consumers as wage growth continues to run ahead of headline inflation and has done so since July at a rate of more than 1% a month. Senior Bank of England officials have on a few occasions expressed concerns about wage growth being too high, however this seems overdone given that both appear to be trending lower as inflationary pressures ease.

The stronger US dollar has come about because of the hawkish commentary coming out of central bankers in Davos mainly ECB policymakers who have pushed back strongly on the idea we could see imminent rate cuts. This reluctance to even contemplate the idea of a cut shifts the focus on to today’s speech by Fed governor Christopher Waller later today and his views on the path of monetary policy and the economic outlook. If he comes across as dovish then the rise in yields we’ve seen today could quickly reverse. 

Commodities

The rise in yields and the strength of the US dollar has put downwards pressure on gold prices, wiping out the gains from yesterday as the tug of war between bond bulls and bears continues to pull the yellow metal back and forth.

Crude oil prices have continued to have an upward bias on reports that another ship had been hit by a missile from Yemen, with the Zografia a dry bulk carrier reporting minor damage. With other ships also reportedly being targeted there is a growing perception that situation isn’t going to improve, with Shell confirming it has suspended all Red Sea shipments indefinitely.  

Volatility

With US markets closed to commemorate Martin Luther King Day, price action was rather muted during Monday’s trade.

UK banks however were something of a standout with traders eyeing a series of key economic releases due from London in the coming days, as well as pricing in broker updates. The thinking is that if weakness is seen here then it will pressure the Bank of England into making rate cuts quicker, something that will trim bank profitability – backed off by the fact that a deteriorating economy could also see loan defaults advance. HSBC stock lost 2.25% on Monday, with one day vol of 41.78% against 24.74% for the month. It was a similar story at Lloyds Banking Group where underlying losses exceeded 2.5% with daily vol of 38.69% and a one month print of 28.8%.

A broker downgrade by BNP Paribas on the food delivery sector saw Just Eat stock also being rattled. The underlying fell more than 7% off the back of the bank’s call to steer clear of the sector, with one day vol printing 109.34% against 60.44% for the month.

Volatility for many crypto assets proved subdued with Bitcoin realising a one-day print of 34.24%, significantly below the one month reading of 53.03%. That pattern of inactivity was repeated across most of the asset class, but the one outlier appeared to be Tron where Monday’s trade saw profit taking against recent gains. One day vol stood at 36.98% against 59.61% for the month.

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