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Euro slips back after ECB hikes by 75bps

Euro bank notes

It’s been another choppy session for European markets, dropping to their lows of the day in the aftermath of the ECB’s decision to hike rates by 75bps, and hawkish comments from Fed chair Jay Powell.

Europe

While ECB President Christine Lagarde tried to walk narrow path from being too hawkish or too dovish, it was comments from the other side of the Atlantic that upended markets during the afternoon session.

In comments made to the Cato Monetary Institute, Fed chair Jay Powell indicated that the Federal Reserve was in no mood to dial back on its intention to hike rates by another 75bps in less than 2 weeks’ time, pushing markets towards the lows of the week.

These losses proved short-lived as the tug of war between bulls and bears over the last two weeks continues to play out.  

Darktrace shares have slid sharply below the levels they were trading at prior to the reports that private equity fund Thoma Bravo was considering making a bid. Today’s news that they wouldn’t be pursuing their interest yet, suggests that they think they might be able to pick it up cheaper in six months’ time, and has completely overshadowed today’s full year results, which to all intents and purposes look quite good.

The company returned a net profit of $1.5m compared to a loss of $145.8m, while improving revenues by 45.7% to $415.5m. Total customers rose 32.1% to 7,437, while recurring revenues over the next three years rose to $942m. This (RPO) Remaining Performance Obligations is the amount of revenue derived from subscription contracts over an average of 33 months.

While the shares have slipped sharply today the debate over the company’s true value will continue to rage, and while today’s news that the bid has failed is welcome news for the London tech scene, it doesn’t mean that we won’t see further interest in the weeks and months ahead given the low value of the pound.

Primark owner Associated British Foods share price has slipped to new multi-year lows today after warning that profits next year are likely to be lower due to rising input cost inflation, primarily due to a decline in operating margins in its Primark business. This led to a cash outflow of £750m primarily due to the higher costs of rising prices which led to £440m of the total.

While net cash has seen a decline, largely due to the logistics of its Primark operation, which saw costs rise by £200m, its grocery business is expected to grow its revenues, as will its sugar and agriculture businesses.

The rest of the retail sector has also remained under pressure with weakness in the likes of Next and B&M European Retail, as the sector continues to get punished after yesterday’s downgrade from Jefferies, amidst concern over their revenues and margins as we head into winter. Sainsbury and Tesco shares are also lower, with Sainsbury shares hitting a 52-week low.

US

Having seen a decent rebound yesterday, as yields took a pause, today’s US session saw US markets fall to the lows of the day, after weekly jobless claims came in below expectations at 222k, and Fed chair Jay Powell reiterated the Feds determination to drive inflation lower.

In company news, while there is increasing concern about the Chinese economy, Tesla’s operations there seem to be back in full swing, as the electric car company delivered 76,965 new vehicles in August, a decent increase from July’s 28,217.

Rivian shares have also jumped sharply on reports that it is partnering with Mercedes to make electric vans in a joint venture at a factory in Europe.

Apple shares are in focus after the latest upgrades to the iPhone 14 were announced last night. The announcement of a new Watch Ultra to deal with the outdoors market was the main takeaway, along with the fact that Apple chose to freeze its prices. The big question as Apple looks towards what tends to be its most lucrative quarter heading into the Thanksgiving and Christmas period, is whether these relatively minor updates will be enough to tempt people to upscale their Apple experience. There is also the question as to how of an effect the freezing of prices will have on its profit margins.

GameStop shares rose sharply in the aftermath of yesterday’s Q2 numbers which saw losses come in slightly below expectations. This was mainly due to a $77m inflow due to the sale of some digital assets, while sales came in short at $1.14bn, well below expectations of $1.28bn.

The announcement of a new collaboration with cryptocurrency exchange FTX helped boost the share price as the company continues its move into the NFT marketplace. It is a little puzzling why this should be treated as such positive news given how the NFT market has imploded in the last few months, along with the sharp declines seen in crypto assets. To the more sceptical among us, it seems another way to lose money, with no indication that its move into this area has reaped any tangible benefits so far.  

FX

It had been widely expected that the ECB would raise rates today, with the only uncertainty being around whether they would go by 75bps or 50bps. The decision to raise rates by 75bps appears to have been dictated by the upgrading of the banks inflation forecasts, which were adjusted higher to 8.1% in 2022 and 5.5% in 2023.

This wasn’t a surprise however the GDP forecasts were, even as the ECB cut its 2023 and 2024 forecasts, to 0.9% and 1.9% respectively, it raised its forecast for 2022 to 3.1%. These GDP forecasts seem extraordinarily optimistic given the energy backdrop, and perhaps speaks to a certain amount of cognitive dissonance on the part of ECB officials. 

The ECB said it expects to continue hiking in subsequent meetings, albeit probably at a slower pace, with the euro rolling over after Powell’s hawkish comments to the Cato Institute, which offset any hint of hawkishness from Lagarde. 

The Australian dollar slipped back sharply today after RBA governor Philip Lowe suggested that the period of jumbo rate hikes was over, and that smaller rate rises were now the better course of action.

The decline in the Japanese yen may well be starting to slow as the noise around the prospect of some sort of intervention starts to grow. BOJ officials said they remained watchful with respect to the decline in the Japanese currency but was careful not to rule out a move if it was warranted.

Having hit a 37 year low against the US dollar yesterday, at 1.1405, the pound is trading around the 1.1500 area as traders absorb the details of the two-year plan to fix energy prices from the new UK government to help consumers and businesses alike overcome some of the worst effects of the surge in energy prices.      

Commodities

After the big falls of yesterday oil prices have seen a modest rebound from 8-month lows, with concerns about demand overshadowing any supply worries. These concerns have been reinforced after weekly inventories rose by 8.8m, against an expectation of a 2m draw.

Gold prices continue to get driven by the ebb and flow of the strength of the US dollar and yields, as it slips back from the highs of yesterday.     

Volatility

The Asia-focused bank Standard Chartered had something of a difficult day on Wednesday with a slump in Chinese exports being seen as a key driver behind sentiment here. The underlying sold off by close on 4%, driving one day volatility on the stock to 55.41% against 38.72% on the month.

Gold prices once again tested lows for the year yesterday, but the move was short lived, and the subsequent rebound was sufficient to lend meaningful support to the constituents in CMC’s proprietary basket of US Gold-related stocks. This instrument added close on 4% on the day, with much of that being delivered in the first few minutes of trade. Daily vol on the basket sat at 70.31% against 52.61% and further price action is arguably to be expected here as the US inflation and monetary policy stories play out.

Against the US Dollar, the Yen pushed out to 24-year highs on Wednesday and many market commentators are of the impression that there’s more to come here, given the policy divergence between the two nations’ central banks. Daily vol on this usually highly liquid pair advanced to 13.05% against 10.5% on the month.

Finally, Natural Gas was the standout in terms of commodities, with the broader down trend remaining intact but erratic market conditions resulting in a more than 6% range in prices being posted. Daily vol on the contract sat at 105%, well up from the 68.99% seen on the month.


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