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Equity markets slide back as European and US services data diverges

It’s been a broadly negative session for markets in Europe with the more defensive qualities of the FTSE100 working in its favour today with outperformance in utilities and pharmaceuticals, helping to push the UK index higher on the day.

Europe

Today’s broader weakness has been all the more curious given that, unlike the weak manufacturing numbers seen on Monday, today’s service sector data in Europe has pointed to reasonably robust economic activity, with Spain and Italy looking especially strong as we head into the key summer tourism season. Spain services sector activity hit its best levels since late 2021, while Italy services activity hit an 11-month high.

Higher gold prices are helping to boost the likes of Fresnillo and Endeavour Mining, while AstraZeneca shares have edged higher after positive results for its Lynparza and Imfinzi combination drug combination trials in respect of improvement in survival rates for ovarian cancer.

Vodafone shares have jumped higher after the telecoms company said it had received bids of up to $4bn for its Spanish business.

Centrica shares are higher as the company starts its additional £300m share buyback program.

Catering group Compass is also higher, pushing up to three-year highs on a positive read-across from sector peer France based Sodexo in Paris after the company raised its guidance for its current fiscal year. Sodexo said it expects to see full year revenue growth of 11% for the full year, citing a strong performance in the half year to the end of February. Coming on top of a positive update from Compass back at start of February the positive outlook suggests a wider buoyancy in the sector as it leaves its pandemic woes behind it. 

On the downside the recent gains in real estate are starting to unwind with Rightmove shares slipping back from yesterday’s four-week highs.

RS Group shares have slipped back despite the company saying it sees full-year profits slightly ahead of consensus. On the downside revenue momentum showed that Q4 was the weakest quarter, with a gain of 1%, compared to a strong H1. The Asia Pacific region saw like for like revenues in Q4 slide by 15%, helping to drag full year revenue growth down to a modest 10%. It is this slowing of momentum that appears to be troubling investors.

US

US markets slipped back on the open after the latest ADP payrolls report for March came in below expectations at 145k, indicating that the impact of the banking crisis hit several sectors of the US economy.

While the number was disappointing its not the lowest number in the past few months, with the January report posting 106k new jobs, while two days later non-farms saw job gains of 504k. US 2-year yields slid sharply on the back of today’s weaker than expected number, as markets continued to push the narrative that the Fed could be cutting before year end. Nonetheless the latest ISM Services report also fed into the weaker economic narrative, slowing to 51 2, with prices paid falling to 59.5 from 62.6, while employment came in at 51.3, down from 54.4.

It does appear from this week’s data the economy is slowing but it has been running hot for a while now so some sort of slowdown is probably due anyway. Furthermore, it’s also interesting to note that while vacancies fell below 10m for the first time since May 2021, the number of vacancies is still very high compared to the pre-pandemic peaks of around 7.5m.

With US equity markets slipping back US 2-year yields are also in retreat as bond markets continue to anticipate the prospect of a Fed pivot.

Walmart shares are in focus after the big US retailer reaffirmed its 2024 guidance at between $5.90c and $6.05c EPS, and still sees net sales of between 2.5% to 3%. Recent forecast estimates had seen these numbers revised up prompting a corrective. 

FedEx shares are higher after the parcels company said it was looking to consolidate its express package and ground delivery units in an attempt to make $4bn of savings. The company also announced it was hiking the dividend by 10% increasing the annual dividend to $5.04c a share.

Palantir shares are also seeing solid gains after agreeing a deal with Microsoft to extend their cloud partnership to the private sector.

Johnson & Johnson shares are also higher after announcing it had agreed to pay $8.9bn to resolve all cancer lawsuits related to its talc based products and fund a trust to cover future claims. 

FX

It’s been a mixed bag for currencies today, with the New Zealand dollar or kiwi initially surging after the Reserve Bank of New Zealand unexpectedly hiked rates by 50bps, confounding expectations of a 25bps move. This surge didn’t last very long with the kiwi slipping back over concerns the New Zealand central bank might be over-reaching.

The RBNZ cited higher-than-expected inflation pressures and a determination to get on top of it as quickly as possible. It’s a high-risk strategy in that it makes the prospect of any economic slowdown sharper than expected. The economy contracted by -0.6% in Q4 of last year with the latest rate increase expected to increase the pressure on the New Zealand housing market.

The Australian dollar has also remained under pressure after yesterday’s pause in its rate hiking cycle.

Commodities

Yesterday’s move above $2,000 an ounce has seen gold prices kick higher with record highs above $2,070 the next target for bullion bulls. Yesterday’s slide in US 2-year yields was the catalyst for the move higher as concerns the US economy is heading for recession continue to increase. The move we’ve seen in the past day or so has been somewhat one-dimensional, however, given the resilience being seen in the services sector.  

Crude oil prices have stabilised close to their recent highs after the production cuts announced over the weekend by OPEC+. Rising uncertainty over the economic outlook in the wake of today’s US data is compounding concerns over an economic slowdown, with prices still below the high point reached on Monday. If OPEC+ had hoped that its weekend move would help drive prices back towards $90 in short order, the economic data appears to be having other ideas.  

Volatility

Precious metals found favour on Tuesday amidst a softening US dollar and falling treasury yields. That saw Silver add close on 4% in the afternoon session before continuing to trend higher still, pushing one day vol on the contract out to 33.05% against 30.5% for the month.

It was a similar story for Gold which broke above the $2,000 mark and tested new highs on Tuesday. That served to support producers of the precious metal, with CMC’s proprietary basket of gold stocks making rapid gains and pushing beyond two-month highs in the process. One day vol printed 51.78% compared with 49.47% for the month.

Activity across cryptocurrencies was subdued and it was a similar situation across the bulk of fiat currencies, too. One modest outlier however was GBP/AUD, with the cross retreating ahead of the RBA rate decision. That may have failed to offer any surprises but the appreciation for the Aussie was sufficient to lift one day vol to 9.61%, ahead of the one-month print of 9.09%.

 


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