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Banks weigh on the FTSE 100, as US CPI comes in hotter than expected

It’s been a negative session for markets in Europe, with the FTSE 100 again struggling for gains and slipping to three-week lows in the wake of the US CPI reading, and some warnings about Q4 bank results. 

Europe

UK banks have proved to be the main laggard, with today’s weakness accelerating in the wake of warnings from Barclays that the final three months of this year were challenging for its investment banking division due to a lack of volatility. US bank Citigroup, aside from the various writedowns announced today, also warned of a similar slowdown in trading revenue in Q4 ahead of its numbers tomorrow. These warnings have served to weigh on the banks with HSBC, Barclays and Lloyds Banking Group acting as the main drags on the UK benchmark.

There have been some plus points today with Premier Inn owner Whitbread higher after posting a strong performance in Q3 reporting an 8% increase in UK like for like sales with a strong performance in both accommodation as well as the food and beverages metric. This momentum has carried over into Q4 with UK accommodation sales running 12% ahead of last year, with revenue per room up 10%, with the company keeping its guidance for the full year unchanged. 

Tesco also started the day off well initially after doing what Sainsbury’s could not do and upgraded its full-year retail adjusted operating profit outlook to £2.75bn, up from £2.6bn to £2.7bn as well as raising its free cashflow estimate to £2bn.  

Taylor Wimpey's share price is lower, giving back some of yesterday’s gains after reporting that group operating profits for the full year are expected to be towards the top end of £440m to £470m guidance. UK home completions for 2023 were 10,438, down from 13,773, although average selling prices were 5.1% higher at £370k.

Marks & Spencer shares are also lower today despite a solid set of Q3 numbers, punished in the same way as Sainsbury’s yesterday for a failure to upgrade its full-year guidance. While the retailer was able to deliver a 10.5% increase in sales for its food business and serve a record number of customers, it also warned of the effects of higher than anticipated wage and business rate costs. It appears to be this that is prompting some profit-taking from the five-year highs of earlier this week, after a stellar share price performance over the last 18 months, and the shares still over 150% higher than they were in October 2022, a truly impressive turnaround.

US

US rate cut expectations for March suffered a setback today after headline inflation accelerated more than expected in December, pushing up to 3.4% from 3.1%, while core prices slowed to 3.9% instead of 3.8%. Part of the uptick was driven by used car and gasoline prices, as well as healthcare, while super core prices also appear to be starting to tick higher again. If this trend continues into 2024, and there is no reason to suppose it won’t, then all that talk of a March rate cut is likely to disappear once and for all. 

Weekly jobless claims continued to highlight the resilience of the labour market, coming in at 202,000, as did continuing claims, which also slowed more than expected to 1.83m. With the blow to the timing for US rate cuts, US markets have struggled to push higher as bond yields recovered off their lows of the day.

Crypto stocks are notable outperformers on the back of the SEC Bitcoin ETF approval, with gains for Coinbase, Marathon Digital, Riot Platforms and MicroStrategy.

Hertz, the car hire firm has slipped back after it announced that it is selling 20k of its EV fleet due to lack of demand, taking a $245m charge in the process and guiding to a Q4 EBITDA loss.

US bank Citigroup is lower ahead of its Q4 earnings tomorrow after announcing it is setting aside $1.3bn in charges due to write-downs in the US as well as additional charges in relation to Russia and Argentina. 

FX

The US dollar had been under pressure in the leadup to today’s CPI numbers for December but soon rebounded after headline inflation edged up by more than expected to 3.4% from 3.1%. Core prices also slowed less than expected, slipping from 4% to 3.9%, undermining expectations that the Fed might be tempted to cut rates at the March meeting.

This setback to US rate cut expectations has seen the rest of the currency space slide back across the board with the Australian dollar amongst the bigger decliners.

The euro also slipped back from 1-week highs, once again unable to claw its way back above the 1.1000 level, with the pound also exhibiting a similar reluctance to move through the 1.2800 area.  

Commodities

Brent crude oil prices have edged higher on reports of an oil tanker hijacking in the Straits of Hormuz, off the coast of Oman with reports of men in uniform boarding the vessel forcing it towards an Iranian port. There is also some nervousness around the potential response from the US and UK to yesterday’s Houthi rocket attacks on civilian and military targets which were shot out of the sky by the respective navies of the UK and US. 

With bitcoin gaining SEC acceptance as far as ETFs are concerned attention has shifted to Ethereum to be on the receiving end of similar treatment in the coming weeks as markets price in the prospect of the crypto market becoming more mainstream, helping to push Ethereum prices to their highest levels since May 2022.

Gold prices which had been higher in the lead-up to today’s CPI release soon retreated from their intraday highs in the face of today’s mildly hot CPI reading.

Volatility

The run higher for natural gas prices stalled on Wednesday, with the underlying pulling back more than 10% from highs seen earlier in the week. While deteriorating weather forecasts and concerns over supply disruption off the back of attacks in the Red Sea had been underpinning recent gains, the upside was arguably somewhat overdone. One day vol on natural gas printed 100.74% against 67.12% for the month.

Japan’s Nikkei 225 made stellar gains on Wednesday as a weakening yen bolstered valuations to a global audience. Posting rare quadruple digit gains on the day, it’s the idea that the country’s central bank will have to hold rates lower for longer as it rebuilds from the earthquake at the start of the year that is bolstering sentiment. However, with a growing number of commentators noting that the economy could now tolerate tighter monetary policy, investors are offering a vote of confidence. One day vol on the Nikkei stood at 16.04% against 14.21% for the month.

It would seem remiss to avoid comment on cryptos after last night’s long awaited SEC ruling approving spot bitcoin ETFs. While the price reaction was relatively muted - arguably the upside had already been priced in – the underlying price of bitcoin did trade in a range of around 5% before ending the session below recent highs. One day vol came in at 73.65% against 51.56% for the month.


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