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European markets break six-day losing streak

With a reasonably positive read across from Asia, which took its cues from comments made by Chinese Premier Li Qiang that new measures were likely to come to support the economy and boost domestic demand, European markets started on a positive note.

Europe

These gains didn’t last very long, rolling over into negative territory after several ECB governing council members, as well as president Christine Lagarde, ruled out the prospect of interest rate cuts in 2024, as well as indicating that more rate hikes were coming, in comments made in Sintra, Portugal. 

We managed to rebound off the lows of the day in the wake of the US open, helped by strong US economic numbers which showed that there was still decent demand in the US economy. This afternoon’s rally in US markets has helped markets in Europe eke out their first positive session since the 16 June, the last time the FTSE 100 and DAX managed to finish the day higher.

Today’s best performers have been Ocado which continues to benefit from speculation that Amazon might be interested, after Lingotto Investment Management increased its stake in the business to 5%. Wise shares have enjoyed a decent recovery today, rebounding after sinking to four-week lows yesterday, with the catalyst being a strong set of full-year numbers that came in well ahead of forecasts.  Full-year revenues increased by 51% to £846.1m, while profit before tax rose 234% to £146.5m, with gross margins remaining broadly flat at 66.2%. In terms of customer growth, this rose from 7.4m to 10m, an increase of 34%. Most customers were personal customers, with business accounting for a very small percentage. For 2024 management said they expect income to grow between 28-33%, falling to 20% over the medium term.

JD Sports shares have slipped back after the retailer warned at its AGM that its business in North America was slightly weaker than expected in Q1, although it maintained its full year guidance that headline pre-tax profit would be in the region of £1bn. BT Group is also lower after being cut to sell by UBS with a price target of 120p.     

US

US markets opened modestly higher after durable goods orders for May came in slightly higher than expected at 1.7%, while ex-transports we also saw a better-than-expected number of 0.6%.

Consumer confidence also remained strong, rising to 109.30 this month, while new home sales saw a huge jump of 12.2% in May, despite higher interest rates, helping to lift US markets further.  

Walgreens shares have dropped sharply after posting a disappointing set of Q3 results and downgrading its outlook for Q4 and the full year. The shares had already been under pressure in the lead-up to today’s numbers and have slipped further towards 10-year lows despite comfortably beating forecasts on revenues at $35.4bn, however profits came up short at $1 a share. On guidance Walgreens took a scalpel to its full year earnings forecast, cutting it from a $4.55c mid-point to between $4 to $4.05 a share. While the company has taken steps to diversify its business away from purely pharmacy and into health care, both sides of the business have seen a slowdown.  

Delta Airlines shares have edged higher after raising its full year guidance for 2023, pushing its EPS forecast to the upper end of the $5 to $6 range. For Q2 the airline says it expects to see a 17% to 18% increase in revenue, and full year revenue up by a similar amount.

We’ve come to the end of the road for electric car maker Lordstown Motors whose shares are tumbling after the company filed for bankruptcy protection, as well as falling out with its partner Foxconn. 

Snowflake shares have also pushed higher after announcing an AI partnership with Nvidia to help customers develop models that will keep proprietary data safe. This comes off the back of another partnerships with Microsoft     

FX

The euro is outperforming today after ECB President Christine Lagarde, along with a host of other ECB governing council members adopted a hawkish stance with respect to future rate rises. It now seems that the central bank has committed to another rate hike in July, with the prospect that we might see another rise in September. Lagarde also ruled out the prospect that rates might come down quickly, although we’ve been here before with respect to Lagarde U-turns. Who can forget her proclamation at the end of 2021 that there was little chance of rate hikes in 2022.

The pound is also slightly higher as traders ramp up rate bets that we’ll see the Bank of England forced to raise rates to over 6%.

The Japanese yen has continued to get battered, sliding to 144.00 against the US dollar, and an 8-year low against the pound.

Commodities

Crude oil prices have continued to struggle despite increasing geopolitical risk, with concerns over the demand outlook outweighing any other considerations. Increased chatter over the potential for further interest rate rises, this time from ECB policymakers and higher recession risk is helping to keep a lid on prices.

Gold prices have continued to come under pressure on the back of rising short-term yields, only this time the pressure is being brought to bear by rising European and UK yields with UK 2-year gilts rising to new 15-year highs above 5.25%.  

Volatility

Shares in Commerzbank continued Friday’s sell off as the new trading week got underway, with investors pricing in the impact of further bad loan provisions being made, along with wider downside pressures for the European banking sector. The stock has now unwound most of the gains it accrued since the start of the month, although support does now appear to be in evidence with the stock closing meaningfully above session lows. One day vol stood at 62.83% against 48.53% for the month.

A turbulent day saw meaningful losses accrued by Italy’s MIB index before this managed to recover and finish the session slightly ahead. Some softer than expected data out of the Eurozone may be highlighting the flaws in the ECB’s continued policy tightening strategy. More misses in terms of economic reports may be sufficient to see the central bank pressured into at least pausing for breath. One day vol on the MIB printed 23.18% against 16.64% for the month.

Wheat prices pushed out to a four-month high on Monday in the wake of that failed Russian coup attempt, but then posted a dramatic reversion in the latter part of the session. Given the questions over drought conditions in the US are persisting it suggests that these recent moves could be seen as driven by speculative trades rather than fundamentals, meaning that downside pressures may not last for long. One day vol stood at 53.83% against 41.3% for the month.


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