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European markets pressured by rising rates

European markets have finished a positive month on the back foot after the latest flash CPI numbers for February from France and Spain surprised to the upside, pushing up yields, and prompting traders to price a peak ECB rate of 4% for the first time.

Europe

UK grocery price inflation also rose to a new record high, rising 17.1% in February according to Kantar Worldpanel, raising the prospect that the Bank of England may have to keep hiking rates in the coming months, if only to keep a floor under the pound.

The FTSE100 has underperformed dragged down by disappointing company updates from the likes of Ocado, Croda and Intertek, as well as weakness in health care sector and defensives.

It’s been a disappointing day for Ocado after the company posted full-year results which showed that group revenues came in flat at just over £2.5bn, while revenue in its core retail business declined 3.8%, falling to £2.2bn. Losses also widened to £500.8m from £176.9m last year, with the retail business contributing to the bulk of the miss, sliding to an EBITDA loss of £4m compared to a £150.4m profit a year ago.

The company blamed higher costs, as well as smaller basket sizes in its JV with M&S, along with the addition of new investment in the expansion of the solutions business.

Intertek shares have also fallen back after a disappointing reaction to a solid set of revenue and profits numbers. If anything, uncertainty over guidance could be weighing on the shares. Full-year revenues were solid coming in line with expectations, at £3.19bn, while pre-tax profits rose to £488.2m.

It’s been a similar story for Croda, the shares slipping back after posting a similarly solid set of full-year numbers. Full-year sales rose to £2.09bn, while profits were boosted by a £356m disposal, which pushed them to £780m, a rise of 89.6%.

The proceeds of this have been reinvested into the business with the acquisition of Solus Biotech for £232m.

AO World on the other hand has seen some solid gains after upgrading its full-year guidance for adjusted earnings to be in a range of between £37.5m and £45m, a decent upgrade from the £35m mid-point upgrade seen in January. Management cited cost reductions as well as margin improvements. 

Abrdn shares pushed higher as they announced their full-year results, as well as laying out plans to sell its discretionary fund management arm Abrdn Capital to LGT for £140m in a move that is set to complete in the second half of the new fiscal year, and which controls £6.1bn in assets.

On the wider business, the story was a little weaker with the business posting a 2022 pre-tax loss of £615m, on revenues of £1.45bn, a decline of 4% from last year. Assets under management fell to £500bn a record low.

Sector peer St. James Place also appears to be doing well, reporting better than expected adjusted pre-tax profits of £514.8m, an increase of 34%.

US

US markets slipped lower on the open as upward pressure on yields served to cap the upside.

On the economic data front consumer confidence for February fell back to 102.90, while the latest Chicago PMI also came in weaker at 43.6.

Zoom Video has opened higher after reporting Q4 sales of $1.12bn, pushing annual revenues to $4.39bn, and Q4 profits of $1.22c a share. The company also said it has seen an increase in enterprise customers over the last 12 months, helped by a 27% gain in those who spent more than $100k on a 12-month basis.

The company says it expects to see Q1 revenue at between $1.08bn and $1.085bn, which was slightly disappointing, however, profits are expected to come in between $0.96c and $0.98c a share. Full-year revenue is expected to rise to between $4.44bn and $4.46bn.

When Target reported in Q3 it cut its guidance for Q4 projecting a modest single digit decline in sales and expecting operating margin of around 3%. Today’s Q4 numbers saw sales increase by 1.2% to $30.98bn pushing annual sales up by 2.8% to $107.59bn. Q4 profits fell by 41% to $1.89c a share, or $876m, but were still better than forecast   Annual profits came in at $2.78bn or 5.98c a share, a decline of 57.6%. Higher costs has been the main problem for Target as a business, these rose by 9.7% to $82.2bn over the year, and this appears to be a trend that looks set to continue.

Target’s Q1 guidance was for sales to come in a wider range either side of zero, from a low single digit decline to a low single digit increase, with profits expected to come in between $1.50c to $1.90c. For the full year Target is expecting a similar sales performance as Q1.

Tesla shares are on the up again today, as optimism over demand continues to drive the shares higher. Today’s news that they are looking to build a new factory in Monterrey in Mexico.

AMC Entertainment is expected to release its Q4 numbers after the bell, along with Rivian and HP

FX

The pound has continued to push higher after a strong performance yesterday, further squeezing various short positions, as optimism over the outlook for the UK economy increases.

Higher flash annual inflation readings from France, which hit a new record high of 7.2%, and Spain for February is also helping to support the euro with markets now pricing in the prospect of an ECB terminal rate of 4%. With inflation numbers from Germany due out tomorrow and expected to remain above 9%, we’ve seen German 2-year yields rise to their highest levels since 2008, above 3%.

In February alone we’ve seen these German yields rise by over 50bps in expectation of further aggressive rate hikes from the ECB, even as the German economy teeters on the brink of a technical recession. 

The Japanese yen has been the worst performer, as it continues to slide back across the board as it looks to test the 200-day SMA at 136.70.       

Commodities

Gold prices have continued to slide back, pressured by higher yields and rising expectations that central banks will be forced to go further when it comes to raising rates, as it looks to slip back towards the 200-day SMA at $1,780.

Crude oil prices continue to ebb and flow between hopes of a pickup in Chinese demand and concerns that central banks are likely to have to overtighten in order to tamp down increasing inflationary pressures.

Volatility

Wheat prices fell again during Monday’s session with the soft commodity trading down to 17-month lows as a result. Despite last year’s concerns that Russia’s invasion of Ukraine would lead to massive market disruption, the maintaining of an export route across the Black Sea has been helping here and talks are already underway to extend this beyond next month’s expiry. One day volatility on US Wheat printed 38.15% against 31.13% for the month.

Hong Kong’s Hang Seng index was active, testing fresh lows for the year on Monday. Traders are reportedly waiting for policy signals from CCP meetings in Beijing which get underway on Sunday, although there is concern as to just how aggressive this support will be. One day vol on the Hong Kong 50 printed 28.92% against 26% for the month.

It wasn’t all negative news from China however with Li Auto comprehensively beating expectations and this resulted in a turbulent start for the ADR on Monday. Prices did however revert to the lows seen late last week, but one day volatility on the stock came in at 116.38% against 84.23% for the month.

And heavy selling for Australia-listed Fortescue Metals pushed price action for the stock, too. Whilst there’s broad-based weakness being seen in the sector, the stock also traded ex-dividend and that appears to be taking a toll. One day vol sat at 82.04% against 52.21% for the month.


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