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Weak tech weighs on US markets ahead of the Fed

Markets in Europe have struggled for gains today ahead of today’s Fed rate meeting, with the FTSE100 helped by a strong performance from the health care sector.

Europe

This outperformance has been driven by gains in GSK after the pharmaceutical giant raised its outlook for the next fiscal year on optimism over the sale of its new RSV vaccine, saying that it expects to see £38bn in sales by 2031, up from previous guidance of £33bn. For Q4 the company did fall short of its profits forecast, despite better-than-expected revenues of £8bn, however this has been shrugged off in favour of the upgraded guidance, helping to give an uplift to the wider sector.

Shareholders have given the thumbs down on Vodafone’s decision to reject an offer once again for its Italian business from Iliad. While there has been no comment from Vodafone, Iliad have said that the €10.5bn bid was turned down despite Iliad offering an additional €100m in cash pushing the cash component up to €6.6bn. This is the second time Vodafone have turned down an offer for their Italian business from the same suitor, and while management have said they are looking at options with other suitors with respect to that business it’s hard to see what these options are. Suitors haven’t been exactly vocal when it comes to banging down Vodafone’s door when it comes to the Italian business, with the only suitor of note being Swisscom’s Fastweb. Vodafone should stop procrastinating, either sell it or make the business work better.

We’re seeing a fair bit of weakness in clothing retail today on the back of a slide in H&Mshares after the retailer missed on Q4 operating profits but also announced that its CEO Helena Helmersson was stepping down to be replaced by Daniel Erver. The miss on profits appears to have been driven by higher operating expenses, which has weighed on margins. M&S, Next and JD Sports are underperforming.

US

US markets have opened mixed after the latest ADP jobs report showed the US economy added 105k jobs in January, and Q4 employment cost index slipped to 0.9%, with the focus on this afternoons Fed meeting and Powell press conference.

The Nasdaq 100 and S&P500 have come under early pressure with some profit taking place in the broader tech sector after a disappointing reaction to last night’s numbers from chip maker AMD and Google owner Alphabet.

Google owner Alphabet shares have slipped back after failing to clear a high bar on its advertising revenue numbers. On the numbers the revenue headline was a beat at $86.3bn, pushing full year revenues up to $307.4bn. On profits we also saw a beat at $1.64c a share, or $20.69bn. Despite this solid set of numbers, the shares have slid back with disappointment over search revenue prompting weakness, even as cloud revenue beat forecasts. Meta and Snap shares have also slipped back, with Meta due to report tomorrow.

AMD shares had also enjoyed a strong start to the year, the shares pushing up to record highs earlier this month on optimism that it would see strong sales boost from the sales of high-speed microchips for AI. Today has seen a reset in that optimism after the chip maker said it expected Q1 revenues of between $5.1bn and $5.7bn, a sharp slowdown from Q4’s $6.17bn and profits of 77c a share.

Datacentre was the key growth area with a 38% increase in Q4 revenue to $2.28bn, however gaming saw a decline of 17% to $1.37bn. AMD also said they expect to see datacentre revenue to be flat, a disappointment to those expecting to see a big ramp up in this area.  Nvidia and Intel shares are also lower on the back of today’s weakness.

Microsoft shares slipped a little on the open despite another record quarter of $62bn in revenue, with commercial cloud also beating expectations with a return of $33.7bn, aided by a 30% increase in revenues for Azure. Profits came in at $2.93 a share. Today’s weakness could well be down to lacklustre guidance on cloud with Microsoft saying said it expects growth to remain stable, with intelligent cloud revenue expected to be between $26bn and $26.3bn, a modest rise from Q2’s $25.9bn.

Boeing shares are higher after the company reported Q4 revenue of $22.02bn a number which beat forecasts but has been ultimately overshadowed by the recent problems with its 737 MAX fleet. Boeing also announced that it was pulling its 2024 full year guidance in the wake of the current problems and that its primary focus now should be that safety must come first. In the company’s message to shareholders CEO Calhoun emphasised he’s focussed on improving quality. The fact that we are still here talking about quality issues almost 5 years after the fatal crashes in 2019 speaks to a massive failure on Boeing management’s part and it is likely to take more than words for an aircraft maker to repair a brand that taken an absolute trashing these past few years. Calhoun’s words are a start, but the fact that he even feels the need to say them shows how far Boeing has fallen.

FX

The euro retested last week’s lows after the latest flash inflation numbers from France and Germany came in softer than expected. Inflation in France declined by -0.2% month on month and slowed from 4.1% to 3.4% year on year.

Yet another weak set of German economic numbers has added fuel to the fire to those calling for an early ECB rate cut.

German retail sales number for December also fed into the idea that we might see an early rate cut from the ECB, while headline inflation for January slowed to 3.1%, from 3.8%, while import prices plunged -1.1% in December. The weakness in today’s numbers given yesterday’s comments from Bundesbank chief Nagel suggest that there is growing concern that Germany’s problems are starting to cause concern.

The euro weakness proved short-lived after the US dollar slipped back in the wake of a weaker than expected December ADP jobs report, and a softer than expected employment cost index numbers, prompting a sharp reversal of fortunes with the greenback sliding sharply across the board towards 1-week lows, as the focus shifts to tonight’s Fed meeting.

Commodities

Oil prices have continued to struggle near their recent highs, but still look set to post their first positive month since September, as concerns over further disruption in the Red Sea prompt an element of caution as markets mull a US reaction to the recent fatal attacks on their troops in Jordan over the weekend.

Gold prices are higher again today rising to 2-week highs, after today’s weaker than expected ADP payroll numbers and soft economic cost index numbers prompted a sharp slide in US yields.

Volatility

Shares in Diageo, Guinness brewer, dropped on Tuesday in the wake of disappointing earnings news. The company took a big hit off the back of slowing sales in Latin America, whilst quick swings in consumer sentiment and high inventory levels also took a toll. The underlying sold off by as much as 4% with one day vol standing at 88.92% well up from the one month reading of 33.54%. Some big moves higher for European car manufacturers bolstered activity for CMC’s proprietary basket of 11 companies covering the sector.

Stellantis – the company behind marques including Fiat and Chrysler - saw its stock add more than 4% with some peers moving higher, too. One day vol on the basket advanced to 53.53% against 29.78% on the month.

RBOB Gasoline prices tipped briefly lower on Tuesday before recovering the bulk of the day’s losses. Refined oil product prices are expected to tick higher given the situation in the Red Sea, so any downside here was perhaps going to be difficult to sustain. One day volatility stood at 35.4%, up from the 33.58% seen on the month.

Better-than-expected economic news out of the Eurozone as the trading bloc skirted recession was enough to lend some limited support to the common currency. Elevated levels of price action were seen across the board, although it was the Euro-Swiss trade that stood out, with one day vol of 6.53% against 6.31% for the month.


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