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Softer inflation expectations help to lift European markets

London skyline with St. Pauls

Friday’s resilient tone has continued into the new week, as falling natural gas prices in Europe, as well as hopes that we’ve seen a peak in US inflation, has helped to maintain and build on the rebound seen at the end of last week, with the FTSE 100 hitting its highest levels this month.

Europe

The weakness in natural gas prices is especially welcome, with UK prices sliding to their lowest levels since 21 July, while prices in Europe have also fallen back in anticipation that the EU will agree targets to reduce consumption and demand over the winter period. The rapid fall in prices is especially welcome given concerns about the effect sustained elevated prices could do to the wider economy as we head into winter.

Having seen steep falls over the last few weeks we’re starting to see a strong recovery in UK retail with the new energy price cap bringing about a degree of certainty when it comes to consumer budgets over the next few months. Consequently, we’re seeing a strong rebound in the likes of Tesco, Sainsbury, Kingfisher, and Howdens Joinery. 

The miners are amongst the better performers, with the weaker US dollar giving a boost to base and precious metals prices, with copper, palladium and platinum continuing to build on the decent gains seen in the past week or so.

US

It’s been a low key open for US markets, which have picked up on the strong theme in Europe in anticipation of another decline in US headline inflation when the August CPI numbers are released tomorrow. US treasury yields which have been rising for several weeks are now also looking a little softer.

Crypto stocks are seeing a bit of a bid with bitcoin heading back towards $23k helping to lift the likes of Coinbase and MicroStrategy.

Energy stocks are also getting a bid on the back of the firmer tone for oil prices, led by Devon Energy Marathon Oil and Occidental Petroleum.  

FX

Comments from Bundesbank President Joachim Nagel that signalled that he wanted to see further rapid rate hikes in Europe has seen the euro hit its highest levels against the pound since February 2021, although we were unable to push beyond the 1.0200 area against the US dollar. These comments were followed by similar comments from ECB governing council member Isabel Schnabel and helped to push the single currency to its highest levels against the US dollar since the 18 August. 

The pound has also had a good day, pushing up to the 1.1700 area against the US dollar, with the weaker US dollar helping to push the pound to its highest levels this month. The July GDP numbers showed that the UK economy rebounded by a modest 0.2% after the -0.6% contraction in June, with the services sector accounting for the bounce back. The hot weather as well as the Commonwealth Games and Women’s Euros helped account for most of the rebound, and while on the face of it the rebound looked feeble it was never likely to be anything else with consumers closely watching the purse strings, with one eye on the risk of a big rise in gas prices in October. Now that is no longer a possibility in the short-term consumers will be able to be budget with more certainty. Now the UK government needs to devise a longer-term proposition for small business.

Commodities

The weaker US dollar and decline in yields is also helping to push up gold prices to their highest levels this month. Tomorrow’s US inflation numbers could act as a further catalyst for a move higher especially if they come in significantly weaker than expected.

Last week Brent crude oil prices hit their lowest levels since before the Russian invasion of Ukraine, though we’ve started to see a turnaround in the last few days as the prospect of a deal with Iran recedes, not that it was very likely to begin with given the mutual distrust on both sides. The fall in natural gas prices over the past few days may also be helping to put a floor under crude prices, on the margins, on the basis that lower natural gas prices will mean that demand for crude oil products could see a pick-up as consumers would have more income to fill up their cars. 

UK Natural gas prices have fallen to their lowest levels since 21 July in the hope that various measures to curb demand will mean that inventory levels could stay higher for longer.

Volatility

European stocks had a solid end to the week with consensus over the 75bps rate hike from the European Central Bank being that banks in particular stand to benefit as profits from lending activities surge. That drove price action for a number of European financial institutions on Friday, with a three and a quarter percent rise in Deutsche Bank shares being particularly notable, lifting daily vol to 72.86% against 49.86% for the month.

That pattern played out across the wider European banking sector, reflecting well on CMC’s proprietary basket of EU bank stocks. This has now recovered the losses accrued in the latter part of August, the underlying advanced close on 2% and daily vol rose to 48.81% against 35.87% on the month.

Keeping with a theme here, Spain’s benchmark IBEX index also had a good session, thanks in part to its 20% weighting in banks and financial services. The Spain 35 cash contract picked up a second day of gains, rising more than 3% in the latter part of the week, with daily vol coming in at 27.86% against 20.86% on the month.

The Dollar/Yen trade which had been powering higher of late broke its run of gains on Friday, dropping by as much as 2% but there’s little to suggest that this marks a wholesale change of theme. Daily vol here came in at 14.22% against 10.92% for the month. Finally, that theme of some dollar weakness also drove interest in select cryptocurrencies, with the benchmark Bitcoin/USD advancing more than 10%, driving daily vol to 54.48% against 44.94% on the month.


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