European stock markets have taken a beating today over concerns about rising inflation expectations, even though bond markets aren’t exhibiting that much in the way of distress. This morning’s latest Chinese factory gate prices appear to have reinforced these concerns after coming in at 6.8%, a rise of over 7% since the end of last year, and the highest level since November 2017.
The FTSE 100 has been hit the hardest hit, with the index closing back in on last week’s lows at 6,912. Despite today’s declines stocks do appear to be recovering from their lows with the FTSE 100 down over 3% at one point, before rebounding from the lows we saw exactly a week ago.
Investors do appear to be freaking out a little bit over the recent sharp rise in commodity prices that we’ve seen in the past few weeks, and which has seen US five-year inflation expectations push sharply higher. We’ve also seen similar moves in EU 5-year inflation expectations but we are only back at levels last seen at the end of 2018.
While this is a concern it also needs to be set in the context of where prices were 12 months ago, which saw oil prices hit some of their lowest levels in years and which saw prices collapse spectacularly as a result of the various lockdowns. There was always going to be a rebound in prices, and we are seeing that now, with the only concern now being over whether it will pass once these base effects wash out.
The biggest losers appear to be in consumer discretionary with IAG shares amongst the worst performers after raising another $800m of seven-year debt as it looks to bolster its balance sheet further against the risks that a return to normal may take a little longer than previously anticipated. It is no secret that airline bosses want to see the introduction of travel corridors, with BA in particular keen to see the resumption of a UK/US transatlantic route as soon as possible. Other airline stocks also appear to be being caught up in the downdraught of today’s sell off with easyJet, Ryanair and Lufthansa nursing quite heavy losses.
Morrisons' share price is a rare beacon of positivity on a day when most shares are down on the day. Today’s Q1 trading update saw total sales rise by 5.3%, with online sales showing an increase of 113%, while fuel sales are back have risen back to levels last seen pre-pandemic. The deal with Amazon appears to be paying dividends, as does the wholesale business which is benefitting from the new McColl’s stores that are now being supplied. In terms of full-year profits these are expected to be modestly higher than last year’s would have been but for the £230m repayment of business rates money, at $435m.
NatWest group shares have seen further losses today on confirmation that the UK government has sold another 5% stake in the bailed-out lender, at 190p a share, reducing its exposure to just under 55%, and down from the 82% stake it took in the aftermath of the financial crisis back in 2008.
When Renishaw’s owners announced that they were looking to sell the business in March, the shares shot up to a record high, with the company which makes precision products for the aerospace, healthcare and dental industry amongst many other high value areas, expected to make a highly valued acquisition to any possible interested party. Today the shares have dropped sharply as various interested parties have cooled their enthusiasm due to a lofty price tag, and reports that the existing owners are demanding certain commitments to R&D spend.
THG shares have seen a big move to the upside after Softbank turned out to be the biggest participant in a fund-raising process by THG to help fund the next leg of its expansion program. The $1.6bn investment is intended for its Ingenuity business which will be separated into a subsidiary operation, standing separate from the rest of its operations. THG Ingenuity is a technology and operating platform which is used by big blue chip corporate brands like Nestle, Procter and Gamble and Johnson and Johnson for their ecommerce operations. It is here that the real growth potential lies with an operation that operates across 5 continents, and what appears to have prompted the big investment from Softbank.
On a separate note, THG also announced the acquisition of Bentley Laboratories for $255m, which when completed is expected to boost full year revenues by $77m.
Darktrace shares have also hit new record highs today after it was announced that the company had extended its partnership with Microsoft on an autonomous Cyber Defence self-learning AI.
US markets opened sharply lower, picking up from where they left off last night, however some of the losses appear to be being tempered a touch.
The latest JOLTS job openings data for March showed a record number of vacancies in the US economy, coming in at 8.12m, putting into stark relief last week’s April payrolls miss. This is a huge number and also shines a light on Fed chair Jay Powell’s recent comment at the last Fed press conference that there are over 8m more Americans currently out of a job than there were in February last year. This suggests the problem isn’t a lack of jobs, but a lack of incentive to go out and fill those positions. That could be for any number of reasons, including benefits that are too generous, to a lack of child care in order to be able to return to work, as well as availability or access to vaccines.
Virgin Galactic shares have taken another nose dive after the company put back its latest launch window, after discovering a possible safety issue on the launch vehicle, as well as reporting a Q1 loss of $55.9m. This was still an improvement on the Q4 loss of $59.5m, but with no revenues coming in and no new set launch date, it appears that investors are starting to lose patience at an accelerating rate.
When Palantir Technologies listed its shares in the US back in September it was yet another example of investors assigning an eye wateringly higher valuation to a company that has never made a profit. That didn’t stop its shares from rising to a record high of $45 back in January, despite the company never having made a profit since it was founded in 2003.
Since then, it’s been a one way move lower, with losses accelerating in the last few days. Today’s Q1 update initially didn’t look like it was going to be able to stem the recent bleeding, with the shares falling again sharply on the open, after reporting a big increase in costs, despite beating on revenues. Losses came in at $123m while revenues rose to $341m, up from $229m a year ago. The company did raise its guidance for Q2 revenues to $360m, along with projected revenue growth of 30% year on year up to 2025, all of which is encouraging; and after a negative start the shares are now back in positive territory. Despite the rebound the numbers do still beg the question as to whether it justifies a current valuation north of $40bn.
Tesla shares, which fell 6% yesterday are in the red again today, crashing faster than their autonomous cars, after the company halted plans to expand its Shanghai factory on rising tensions between the US and China, as well as a 27% drop in car sales in April.
Amazon shares opened quite a bit lower on the open after issuing $18.5bn of debt, with the longest portion of it being 40 years, despite not needing the cash. One can speculate as to why Amazon has decided to do this, but it could just be they want to lock in the low rates now, building up a decent cash pile in the process, if indeed rates do start to head higher as inflationary pressures rise.
The US dollar has taken another leg lower today, with rising commodity prices helping to drive gains in commodity currencies with the Canadian dollar hitting its highest levels against the greenback since September 2017.
The pound has continued to look resilient ahead of a raft of key data announcements this week, starting with tomorrow’s UK Q1 GDP, and manufacturing numbers for March, which are due out early tomorrow morning.
The latest ZEW survey of economic sentiment saw the euro hit its highest level against the US dollar since late February, after rising sharply in May to 84.4, a multiyear high, however there was little in the way of a boost against the pound, which has managed to hold its ground.
Reduced crude oil demand from refineries appears to be weighing on crude oil prices, while gasoline output is also falling as a result of the disruption at the Colonial pipeline. At some point however this will see inventories fall back, which in turn is likely to help put a floor under prices.
Gold prices have slipped back after initially hitting a one year high yesterday, on the back of a weaker US dollar. The modest increase in US 10-year yields appears to be taking the edge off the recent rise in gold prices, along with the fact that it is also closing in resistance at its 200-day MA.
Disclaimer: CMC Markets is an execution-only service provider. The material (whether or not it states any opinions) is for general information purposes only, and does not take into account your personal circumstances or objectives. Nothing in this material is (or should be considered to be) financial, investment or other advice on which reliance should be placed. No opinion given in the material constitutes a recommendation by CMC Markets or the author that any particular investment, security, transaction or investment strategy is suitable for any specific person. The material has not been prepared in accordance with legal requirements designed to promote the independence of investment research. Although we are not specifically prevented from dealing before providing this material, we do not seek to take advantage of the material prior to its dissemination.