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Rate cut pushback and weak China data pushes FTSE 100 to lowest levels since November

A combination of disappointing economic numbers out of China and an uptick in UK inflation for December has seen European markets roll over sharply, as the prospect of early rate cuts continues to get pushed further into 2024.

Europe

Having seen strong gains heading into year-end on a pre-Christmas rate cut optimism binge, markets are now getting a January hangover as reality bites and the prospect of March rate cuts recedes. 

While the modest miss on Chinese Q4 GDP was negligible, it was another disappointing set of retail sales numbers for December which appear to be the biggest concern, along with the continued problems in its property sector that have served to prompt further uncertainty about the world’s second biggest economy.

Markets had already been in retreat in the lead-up to today’s economic numbers after Fed governor Christopher Waller said that rate cuts should be done methodically and carefully, and in a calibrated fashion. These comments spoke to a central bank that is in no rush to cut, and that rapid cuts are not necessary given that US retail sales data showed that the US consumer continued to spend at the end of last year.  

This recalibration on rate cut timing on both sides of the Atlantic, along with today’s disappointing Chinese economic numbers has seen the FTSE 100 fall to six-week lows, and on course for its worst daily decline since July, with basic resources and real estate leading the losses sector wise.

The biggest losers have been housebuilders, with Persimmon and Barratt Developments slipping back further from their recent multi-month peaks, having seen 30% to 40% gains from their October lows, as selling pressure intensifies against a backdrop of rising gilt yields, and concerns that the UK consumer will have to wait longer to see interest rates to come down. 

The weakness in the China data is weighing on the likes of Glencore, Antofagasta, Prudential and Standard Chartered.

A flourishing UK and Ireland business in Q4 hasn’t been enough to prevent Just Eatshares falling sharply today, despite revising its earnings guidance up to €320m and becoming cashflow positive in H2. Sharp declines in GTV in its North American business of 15% and its small regional businesses in Australia and Southern Europe of 17% has seen the shares slide back.  

US

US markets have picked up where they left off yesterday, opening lower as rate cut bets get pushed into the summer, with today’s US retail sales numbers for December reinforcing that message with a rise of 0.6%, against an expected 0.4%.

We also saw the retail sales control group, which is a key component of US GDP, rise 0.8%, while the November number was revised up to 0.5%.  This suggests that the US economy ended the year on a strong note and pretty much kills the prospect of a March rate cut, with markets now repricing for June.

Today’s weakness has been led by the Nasdaq 100, while US 2-year yields rose back to the levels they were at prior to the release of last week’s inflation numbers.

The decision by a US judge to block the deal between JetBlue and Spirit Airlines on antitrust concerns saw the shares of Spirit plunge 47% yesterday, and they have come under further pressure today, sliding to fresh record lows below the levels we saw back in March 2020. The collapse of the deal and subsequent share price declines now puts Spirit very much in a battle to survive, at a time when the US economy could start to slow and the competition for passengers in the budget space becomes more intense. It is perhaps ironic that an airline that has its ticker as SAVE may soon be in need of a rescuer, given that it hasn’t made an annual profit since 2019. 

Tesla shares have continued to look soft with the price cuts that were announced for China now being extended to its markets in Europe.

Manchester United shares are lower after the football club cut its sales and earnings outlook due to anticipated declines in broadcast revenue, after crashing out of the Champions League having finished bottom of their group. 

FX

The pound is making strong gains across the board, except for the US dollar, after headline, core and services CPI for December all came in higher than expected, pushing back market expectations of when to expect the first rate cut from the Bank of England. This hawkish surprise while being touted as somewhat of a one-off overlooks the fact that services inflation has remained stubbornly above 6% since September 2022, on a backward calculation basis. That would suggest it isn’t going to come down quickly, and that stickiness is likely to be an ongoing concern for the central bank, when they meet in just over 2 weeks’ time when they update their GDP and inflation forecasts for the rest of 2024.

UK 2-year gilt yields in response have risen 20bps and back at the levels they were in mid-December at 4.36% having slipped to as low as 3.97% at the end of last year. 

The US dollar is also stronger in the wake of Fed governor Waller’s comments yesterday that the central bank is in no rush to cut rates from their current levels, reinforcing the December dot plot forecasts that the Fed only sees a maximum of 3 rate cuts by year end, while the strong US retail sales numbers for December merely served to indicate why Waller was so cautious in his comments last night.  

The Australian dollar is the worst performer on a combination of a stronger US dollar, and concern over the economic prospects for China as we head into 2024.

Commodities

The strength of the US dollar as well as concerns over Chinese, as well as global demand, is seeing oil prices retreat, slipping back towards one-week lows, with the tension in the Middle East taking somewhat of a back seat in the short term.

Gold prices had remained remarkably resilient despite the rebound in the US dollar and the strong rebounds seen in yields these past few days, however the better-than-expected US retail sales numbers took the legs out from underneath it, sending it sharply lower, below its 50-day SMA and towards $2,000 an ounce. 

Volatility

Perhaps unsurprisingly, Boeing’s stock descended further on Tuesday in the wake of more handwringing over the near disaster of recent weeks. More scrutiny is being put on build quality and the company has called on big customers to help support the process, but with fears running high that pressure to deliverer returns for investors has been a key driver, yesterday’s 8% sell-off takes year to date losses to more than 20%, One day vol now stands at 82.93% against 44.87% on the month.

Some significantly weaker than expected economic data out of Australia saw the Aussie dollar accelerate its declines against the greenback, breaking below 0.66 for the first time in around five weeks. The prospect of more disappointing economic data out of Beijing is also weighing here, along with the idea that any quick US rate cut may now be looking less likely. One day vol on the pair stood at 10.49% against 9.31% for the month.

Corn proved to be something of a standout on Tuesday with the crop price having seen an accelerating sell off in recent days. We’re now trading down at levels not seen in over three years and a brief rally as buyers moved in yesterday proved to be unsustainable. Although yields are being pressured in the longer term, production reports for 2023 appear robust. One day vol printed 26.53% against 19.13% for the month.


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