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FTSE 100 shrugs off surprise surge in UK CPI

Today’s unexpected jump in UK headline and core CPI initially saw the FTSE 100 open lower, with a rebound in the pound, and weakness in the real estate sector initially weighing on the index.

Europe

As the day has progressed and the pound has slipped back from its intraday peaks, the UK benchmark has slowly clawed its way back into positive territory, led by the banking sector, and consumer staples, as the index looks to claw back some of the losses of the past few weeks. The gradual return of confidence in the banking sector after last week’s losses has helped, along with the rebound in yields, with HSBC and Standard Chartered leading the way, while the resilience of the likes of Haleon, Unilever and Reckitt Benckiser are helping to support today’s gains.

UK 2-year gilt yields have jumped over 20bps in anticipation of a 25bps rate hike from the Bank of England tomorrow as well as the prospect of a higher terminal rate, while ECB President Christine Lagarde reinforced the hawkish tone on the other side of the Channel by pointing out the likelihood of further rate rises to come, given continued high levels of inflation.

The worst performers today have been British Land, Land Securities and Segro, with the sector still absorbing the impact of a broker downgrade yesterday for British Land from Goldman Sachs.

Fevertree shares rose to their best levels this year after reporting preliminary full year results that came in ahead of forecasts, despite rising cost pressures. Full year revenues rose by 11% to £344.3m helped by a 23% rise in its US operations, which offset a 2% decline in its UK business, which now accounts for just over a third of its business. The rise in costs saw gross margins fall from 42.1% to 34.5% with the cost of glass contributing to the decline. Full year EBITDA came in marginally ahead of forecasts at £39.7m, a 37% decline from last year. On the outlook for 2023 Fevertree said it was maintaining its revenue guidance at between £390m and £405m and EBITDA of £36m and £42m. 

Marks & Spencer shares have got a welcome lift after receiving multiple broker upgrades with Citi raising it to a “buy” on the basis that inflation is likely to slow towards the end of the year, and that the business has managed to get strong control on its costs. .

US

US markets opened modestly lower today with all eyes on today’s Federal Reserve rate decision where it is expected the central bank will raise rates by 25bps, but be slightly more cautious about the prospect of further increases, at a time when sentiment is increasingly fragile. In a sign that the US banking crisis continues to reverberate, PacWest Bancorp shares fell sharply after the bank said it had secured $1.4bn in additional funding, as well as saying it had seen a 20% deposit outflow since the end of last year. First Republic bank which is currently at the centre of the storm shares are currently lower.

Nike shares fell after hours despite reporting Q3 numbers that saw a significant improvement in its Greater China business compared to Q2. Q3 revenues came in at $12.39bn well above forecasts, however a bigger than expected build up in inventory served to drag on its margins which fell more than forecast to 43.3%. Inventory levels are currently 16% above the levels they were last year at $8.9bn, while their forecasts for Q4 were also relatively conservative, with an expectation of flat to low single digit revenue growth.

GameStop shares have surged out of the blocks after reporting a surprise Q4 profit of $0.16c a share. Q4 revenues came in at $2.23bn, only slightly below the levels they were a year ago, helped by a strong performance from collectibles and hardware sales. It is important to note that the profit numbers were boosted by a $4.5m boost from the sale of some digital assets.

FX

The pound hit six-week highs against the US dollar earlier today after the latest inflation numbers showed a surprise increase in February, putting the prospect of further rate rises back on the table, with another 25bps expected when the Bank of England meets tomorrow. The crisis in banking along with recent dovish commentary from the likes of Bank of England governor Andrew Bailey earlier this month prompted some of the more hawkish bets get taken off the table in a sign that rates are probably near to a peak. Today’s inflation numbers put that narrative into doubt as markets reprice the prospect of another 25-50bps in the coming months. 

The US dollar is also slipping back a touch ahead of tonight’s Fed rate decision, where it is expected the central bank will go ahead and hike rates by 25bps, on the belief that the recent problems in the US banking sector look to have been contained.   

Commodities

Crude oil prices are treading water after two days of gains, with a slightly weaker US dollar helping to keep a floor under prices. Higher than expected UK inflation numbers have raised concerns about future demand have served to pull prices off their highs of the day. With inventory data due out later there is a concern that sticky inflation could act as a headwind to further gains.

Gold prices have also paused after yesterday’s steep declines, with the rise in yields helping to constrain the upside, with the risk we could see further losses later today. Any indication that the Federal Reserve might be steering towards a more dovish path on rates later today could see prices rebound quite sharply.

Volatility

As markets try to look beyond the bank crisis, volatility emerges in gold & natural gas. With a degree of calm returning to markets, gold prices are retreating following that brief test of the $2000 mark at the start of the week. That played out notably across CMC’s proprietary US Gold basket, covering 15 shares with exposure to the industry. The underlying gave back the bulk of gains accrued on both Friday and Monday, sliding more than 3% on the way.

One-day volatility on the basket sat at 55.69% versus 47.55% for the month. US Natural Gas prices tested four-week lows on Tuesday, with forecasts of milder weather weighing. There’s also news that Europe plans to continue reigning in consumption for another year with the war in Ukraine far from being over. One day vol on the contract printed 92.15% against 80.37% on the month. Bitcoin is consolidating those recent gains and remains above the $28,000 level but the elevated price action which has been evident of late is now ebbing away. That has served to push the daily volatility print below the monthly equivalent with readings of 53.56% and 53.98% respectively being seen.

As the rebound for banking stocks continues, they remain dominant in terms of single stock price action. Credit Suisse added more than 7% on Tuesday but remains well below last week’s levels. One-day vol here printed 298.44% against 184.88% on the month, whilst even HSBC made it onto the list, with one-day vol of 65.05% compared with 47.76% for the month.


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