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Dovish hike from Bank of Canada kicks off a risk rally

London skyline

It was looking set to be another mixed bag of a day for markets in Europe, until 3pm when the Bank of Canada raised rates by a less than expected 50bps to 3.75%, in a move that suggests that central banks are starting to wake up to the possibility that too aggressive rate rises could do more harm than good.

Europe

It’s also got markets asking the question, could the Fed follow suit next week after another poor set of housing numbers from the US.

A jump in basic resources saw the FTSE100 rebound back into the black as the US dollar slid, and copper and crude oil prices surged higher, helping to lift the mining heavyweights 

There’s been little if any reaction to Barclays Q3 numbers with total revenues coming in at £5.9bn, a 9% increase from the same quarter a year ago. The corporate and investment bank saw a 10% decline to £2.8bn, however this was offset by a big increase in its consumer, card and payments division which saw a 54% increase to £1.24bn. The bank also set aside £381m in respect of credit impairments, pushing up total impairment provisions to £722m year to date.

Operating costs also rose by 14% during the quarter to £3.94bn, as profits after tax for the quarter, rose by 9% to £1.7bn. Year to date Barclays profits are down 19% largely down to the fact that last year saw profits boosted by the release of loan loss provisions which flattered the numbers.

After HSBC’s numbers yesterday, Standard Chartered numbers didn’t provide much in the way of optimism despite beating expectations on pre-tax profits and revenues, with the shares falling back for the second day in succession.

Underlying operating income rose 15% to $4.3bn, while profit after tax for Q3 saw an increase of 41%, coming in at $1.08bn, helped by a boost to net interest margin to 1.43% from 1.23% a year ago. Loan loss provisions saw an increase to $227m. On the outlook Standard Chartered was slightly more cautious with credit impairments likely to be slightly above the current annualised loan loss rate.

Reckitt Benckiser shares have fallen back after reporting a 7.4% rise in Q3 revenues on a like for like basis to £3.7bn with the health and nutrition businesses driving the outperformance. Health saw revenues rise 10.7% on a like for like basis to £1.53bn, while nutrition rose to £675m, a rise of 24.7%. Hygiene was the laggard falling 1.2% on a like for like basis to £1.53bn. 

On any measure these numbers look decent with the company able to show that rising prices aren’t hindering sales growth.  The company also tightened up its like for like sales growth outlook to between 6% and 8%, however it appears investors aren’t convinced with the shares sliding back towards the six-month lows seen earlier this month. 

On the plus side AstraZeneca shares are higher after reporting that its latest drug trial son Capivasertib met their primary endpoints. 

US

US markets initially saw a mixed open with the Nasdaq leading the losses after both Microsoft and Alphabet’s latest quarterly numbers prompted a negative reaction after hours, and which has resulted in sharp falls for both on the open, although we have seen a bit of a turnaround in the wake of the Bank of Canada decision.

In the case of Alphabet, the reaction was more understandable given that revenues came in below expectations, and operating margins shrank. Q3 ad revenue came in at $54.48bn, below expectations of $56.98bn, although at least the numbers were higher than the same quarter a year ago. The same can’t be said for YouTube which saw revenues decline to just over $7bn, down from $7.2bn a year ago. The only silver lining was its cloud business which saw revenues rise to $6.87bn from $4.99bn. Operating margins also declined to 25% from 32%.

Microsoft’s numbers were better than expected, albeit with some weak spots, notably in Windows OEM, as well as Xbox services and content revenue which were a drag. On guidance Microsoft was more pessimistic predicting that weaker PC demand could see a high 30% decline in Windows revenue in Q2, while both companies blamed the impact of a stronger US dollar for the underperformance over the quarter.

After the close we get the latest instalment of the earnings story with the release of Meta Platforms Q3 numbers. Expectations have already been lowered due to the Snap miss last week, and the underperformance in Google’s ad numbers yesterday. Q3 revenues are expected to come in between $26bn to $28.5bn, as Facebook and Instagram face down the challenge from TikTok which is pulling users away. The focus on the Metaverse is also eating into profits with its investment there showing few signs of paying off in terms of profits in the short term.

FX

The US dollar has continued to slide in anticipation of a possible pause, or slowing in the Fed’s rate hiking cycle in the coming weeks, with today’s dovish hike from the Bank of Canada exacerbating the broader US dollar weakness. Weakness in the US economy does appear to be prompting a reassessment of the size and pace of hikes if recent comments from San Francisco Fed President Mary Daly are any guide. It will be interesting to see whether any of her colleagues share her concerns in the coming weeks.

The pound pushed back above the 1.1600 area against the US dollar today and risen against the euro despite the prospect that next week’s budget statement has been delayed until 17th November in order to allow time for the OBR to come up with new forecasts. If it’s just because of some minor tweaks here or there that’s less of a problem for markets, as well as the Bank of England as long as the central bank is aware of the main thrust of fiscal policy when it makes its rate decision next week.

The main talk appears to be over how the new government can plug a £35bn black hole, with talk of a list of 104 different options to cut spending. This seems somewhat premature when we already know that the price of the energy price bailout may not be anywhere near the original £60bn that was predicted given the current direction of travel of natural gas prices. It seems utter madness not to take that into account and blithely go ahead and start raising taxes and cutting spending at a time when demand is about to slow further as we head into the winter. This could also be another reason behind the delay in putting the finishing touches to the budget.

The Canadian dollar slipped back from its highs of the day after the Bank of Canada raised rates by a lower-than-expected 50bps to 3.75%. This would appear to suggest that central banks are becoming more concerned about over tightening and crushing demand given the RBA did something similar in earlier this month. Canada also has a housing market that is vulnerable to higher rates, and this is likely to have played into today’s 50bps decision along with weak business sentiment.  

Commodities

Crude oil prices have taken a leg higher in the wake of today’s Bank of Canada smaller than expected rate hike. With all the concerns that central banks are overtightening into a slowdown, any recognition that a pivot might be on the way on the part of central banks is being taken as a positive for risk assets.  

Gold prices have legged higher on that very basis as yields continue to look soft and the US dollar continues to weaken. Will the Fed follow suit and soften its tone on aggressive rate hikes from next week.

Volatility

Baidu’s stock attempted to claw back some losses on Tuesday as bargain hunters moved in following the sell-off at the start of the week. The market did succeed in locking in some gains but overall, it was something of a turbulent session and one day vol on the US ADR came in at 192.23% against 77.9% on the month.

Attention wasn’t limited to Chinese stocks yesterday either, with a trading update from The Hut Group receiving a supportive response from shareholders. The underlying advanced by almost 20% here and the question many will be asking is whether this marks some kind of turning point for the company’s fortunes. One day vol came in at 305.98%, compared with 177.04% on the month.

Those Chinese tech stocks continued to find a modest degree of support having been beaten down earlier in the week and that lead to elevated levels of price action for CMC’s proprietary basket covering the sector. The underlying added more than 3.5%, although still sits down by almost 10% from Friday’s close. One day vol came in at 78.01% against 70.44% on the month.

And finally, a bullish run for the kiwi dollar left the NZD/USD trade at the top of the board for currency markets. One day vol here hit 22.06% on Tuesday, compared with 20.55% on the monthly reading, with a retest of weekly highs in focus.


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