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Slowing inflation weighs on the US dollar

European markets have undergone a slow start to the month after yesterday’s sell-off, as attention switches away from the US debt ceiling, and towards the broader economic outlook, and increasing evidence that inflation is slowing sharply.

Europe

The FTSE100 has edged higher with a rebound in copper prices helping to support the miners. Other strong performers are the likes of surgical equipment group ConvaTec, after an upgrade from Morgan Stanley, while B&M European Retail has continued its gains from yesterday, pushing up to 13-month highs.

Amongst some of today’s biggest fallers have been National Grid and Severn Trent after both stocks went ex-dividend, while continued weakness in luxury is weighing on the CAC 40

Auto Trader shares are also under pressure after seeing operating profits decline by 9%, due to costs of £44.1m incurred as a result of the Autorama acquisition. Today’s full year results showed solid revenue growth of 16%, as group revenue rose to £500.2m, however the reluctance to raise guidance after a decent rebound from last year’s lows is prompting some share price weakness.

Dr Martens shares haven’t had a good time of it of late, and the pain continued today, after investors reacted to a miss on profits.

Today’s full year results were expected to see revenue to rise to £1bn, which is still a respectable improvement on last year’s £908m, however net profits fell short of the £140m estimate, coming in at £128.9m. This was due to a £3.9m impairment charge, as well as a £10.7m hit in relation to FX effects on euro bank debt.

On current trading management have maintained revenue guidance for fiscal year 2024 to mid to high single digit growth, with H2 expected to perform better than H1.

US

After yesterday’s sharp falls US markets have opened slightly lower with the latest May ADP payrolls report and weekly jobless claims still pointing to a resilient labour market.

ADP saw a total of 278k jobs added in May, well over the 170k predicted while jobless claims remained low at 232k.

In a sign that consumer discretionary spending is slowing in the US, we've seen both Macys and Dollar General cut their guidance for the rest of the year, citing evidence that demand trends have weakened, and that the macroeconomic environment is becoming more challenging, sending the shares in both sharply lower.

Target shares are also getting clipped on the back of a downgrade from JPMorgan who have cited similar trends to those being cited by Macy’s and Dollar General.  

The AI rally already looks as if it’s run out of road with sharp falls in the NVidia share price yesterday after peaking at $420 earlier this week, while C3.ai shares also slipped back yesterday, and are also plunging today, after reporting disappointing forecasts for the upcoming financial year.

Q4 revenues were able to beat forecasts coming in at $72.4m, however its predictions for Q1 were disappointing, targeting a range of $70.5m to $72.5m, with a full year forecast of between $295m and $320m. Full year adjusted net losses are expected to improve slightly with only a modest improvement to -$35m.  

Salesforce shares have been on a slow road to recovery after hitting their lowest levels since March 2020, back in December last year, closing at one-year highs yesterday, but have slumped sharply today after keeping full year guidance unchanged.  

When the company reported in Q4, the outlook for Q1 revenues was estimated at $8.16bn to $8.18bn, which was comfortably achieved with $8.25bn while profits also beat, coming in at $1.69c a share. For Q2 the company raised its revenue outlook to $8.51bn to $8.53bn while keeping its annual 2024 revenue guidance unchanged at a minimum of $34.5bn, a decent increase from 2023’s $31.35bn.

Broadcom shares have been on a decent run of late, boosted by optimism that strong demand for its variety of end markets including hyperscale data centres, service providers, and enterprise customers will continue. For Q2 revenues are expected to slow modestly from Q1 levels to $8.72bn, along with profits of $10.16c a share. These past few days have seen the shares hit record highs after the company signed a billion-dollar multiyear deal with Apple for 5G radio frequency components for the iPhone. It also got a lift from Nvidia’s blowout earnings numbers as well.   

FX

It’s been a choppy session for currencies with the US dollar seesawing as a result of today’s economic numbers. A strong ADP payrolls report for May saw yields push higher, however this move proved short-lived after a weaker than expected Q1 unit labour costs report saw yields slide and the greenback move back to the lows of the day, with the move accelerating after ISM prices paid slid sharply in May to 44.2.  

Along with this morning’s EU CPI report there is increasing evidence that inflation is starting to slow sharply, after May core CPI fell back more than expected, from 5.6% to 5.3%. While in itself it doesn’t suggest that the ECB will stop hiking rates it does suggest that the upcoming hikes are likely to be of the 25bps variety, and will be fewer than expected.

The pound is performing slightly better than its peers moving to within touching distance of the 1.2500 level against the US dollar and a 2-week high, despite similarly weak economic data today.

Commodities

Crude oil prices have rebounded from 4-week lows ahead of this weekend’s OPEC+ meeting, with the outside risk that oil ministers could surprise the markets with another production cut, given the recent weakness seen in prices. Despite the modest rebound being seen today there appears little appetite to drive prices significantly higher with today’s manufacturing PMI numbers still pointing to lacklustre economic activity through May. The weak numbers, along with evidence that input prices are falling sharply suggests that confidence is low when it comes to the demand outlook.

Gold prices appear to have found a short-term base in the past few days, with the recent decline in yields helping to put a floor under prices. Today’s economic numbers which show that inflation appears to be slowing is helping to push prices higher and could well see it push up to the $1,980 area.    

Volatility

Tesla’s stock has been on the up throughout May, adding around 25% over the course of the month and seeing Elon Musk regain his title of being the world’s richest person as he met with Chinese government officials on Wednesday. Yesterday’s stuttering break above the $200 mark was sufficient to lift one day vol on the stock to 101.52% against 67.75% on the month, something which is notable for an entity with such a weighty market cap.

Keeping with the sector, a somewhat different narrative was seen across CMC’s proprietary basket of stocks involved with driverless cars. Profit taking at NVIDIA – the basket’s biggest constituent - following last week’s stellar gains for the firm saw the underlying value fall back around 1.25%. One day vol stood at 37.61% against 29.43% on the month.

The Nikkei was again the most active equity index, rallying off the back of the last few days of losses. Ratification of the US debt ceiling resolution has the potential to be lending further support here in the near term, but one day volatility posted 18.29% against 14.41% for the month.

Oil prices snapped back from 4-week lows on Wednesday. We have seen support kick in around these levels on several occasions this year as it aligns with the lower end of the bracket where the US will buy up strategic oil reserves. Brent Crude proved to be the most active, with one day vol of 42.73% against 33.12% for the month.


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