European markets initially raced out of the traps in early trade after Asia markets rallied strongly on unconfirmed reports that China was looking at a plan for the unwinding of its current zero-covid strategy, with the creation of a “Reopening Committee” which would study options for a reopening of the Chinese economy at some point in the future.
While this might come across as wishful thinking for the most part, Chinese authorities will have to relent on this policy at some point, although it’s unlikely to happen much before March next year. Nonetheless, you’d have to be naïve to think that China wouldn’t be wargaming some sort of plan, but even if they are, and are targeting the end of Q1 next year, that still means at least another two quarters of underperformance for the Chinese economy, with mixed results for the global economy.
As a reminder the market has been waiting for months now for some form of China reopening with little idea of when it is likely to happen. It’s unlikely to happen quickly, and if it does then oil and gas prices could surge quite sharply, introducing a fresh inflation shock to the global economy. In a way it would be better for the inflation narrative if Chinese demand were to stay weak throughout the winter months.
One other factor driving the current move higher is a hope that the Federal Reserve may follow in the likes of the Bank of Canada and the RBA in starting to slow the pace of their rate hiking cycle, after tomorrow’s expected 75bps rate hike. This initially saw US yields fall back sharply and the US dollar slide back along with strong rebounds in commodity prices, notably crude oil and copper, however this yield weakness has been tempered by some resilient US economic data released earlier this afternoon, which has seen equity markets retreat from their highs of the day.
Also gaining we’ve seen a big jump in the Ocado share price, rising over 30%, and leading the FTSE100 higher after the company announced a partnership with South Korea’s Lotte Shopping. Lotte Group is one of the biggest businesses in South Korea with total annual revenues of around £45bn, while the shopping arm has annual revenue of £9.5bn. Ocado will be supplying the knowhow to improve the groups online business offering in South Korea.
BP shares have underperformed despite posting another set of decent quarterly numbers, as Q3 underlying replacement cost profit came in well above expectations of $6.2bn, at $8.15bn, while announcing a further $2.5bn buyback. Inevitably the numbers have acted as political catnip to the usual suspects, however they also overlook the fact that when various other items are considered, actual profits attributable to shareholders this quarter is zero, due to an accounting adjustment which pushed the company into a loss of $2.16bn.
This adjustment came from its gas and low carbon energy unit which once again outperformed with profits of $6.24bn, however due to the volatility in forward gas markets and a repricing of forward gas prices, this has turned into a loss of $2.96bn for the quarter. Its oil production and operations division returned $5.21bn in profits.
On top of the Rosneft adjustment earlier this year that means BP has recorded a -$13.29bn loss attributable to shareholders so far year to date, but that inconvenient fact has flown under the radar, as our political class seek to deflect the blame for their own energy policy shortcomings by painting the oil companies as the bogeyman. BP, unlike Shell, has paid additional tax on its UK earnings this year, setting aside an extra $800m in Q2, in this quarter’s accounts.
The initial decline in yields today saw US markets open strongly higher as we got a new month underway, however today’s ISM and JOLTS data have muddied the waters somewhat when it comes to the Fed’s reaction function. Today’s economic data was solid with ISM and manufacturing PMIs both beating expectations, while prices paid fell back and employment remained strong.
Another factor that the Fed would have to weigh is the effect on prices a China reopening might have. Do they want to keep control of the inflation narrative, or run the risk it runs away again when China reopens?
Pfizer shares have also edged higher after the pharma giant upped its guidance for full year sales of its vaccine to $34bn, up by $2bn, while raising its earnings guidance to $6.40c to $6.50c a share. In its statement Pfizer said that while sales may fall from the levels seen in 2022, its revenues have been boosted by the much higher prices being charged per vaccine.
Pfizer has already raised prices several times over the last two years for its Comirnaty vaccine yet surprisingly little is said about this type of huge mark-up which it could be argued is simple profiteering. Today’s guidance upgrade has also helped lift the likes of Moderna and BioNTech as well.
The US dollar has slipped back a little with the Japanese yen being one of the main gainers.
The Australian dollar initially saw some modest gains but has since slipped back despite the RBA’s decision to raise rates by another 25bps.
Today’s US dollar weakness has been reinforced by a solid ISM manufacturing report, with prices paid falling to 46.6, while employment improved from 48.7 to 50 in October.
The number of job openings also rose to 10.7m in September, up from 10.28m in August. The US economy seems to be seeing the best of all worlds, a resilient labour market while prices are falling. That presents the Fed with a dilemma given that other inflation measures still look resilient. Can the Fed afford to give the impression of a pivot or pause at this point irrespective of the political pressure being brought to bear by certain Democrat politicians.
A weaker US dollar, as well as optimism over the China reopening story has given crude oil prices a lift, rebounding strongly after two days of declines. There also appears to be an increasing belief that we’ll start to see the US central bank start to slow the pace of its current aggressive rate hiking cycle, hence the decline in yields we’re seeing today.
Gold prices have also legged higher on the back of the sharp decline in US treasury yields, rebounding from one-week lows.
It was a turbulent start to the week for equities in Hong Kong with the local market attempting to brush off a fall in Chinese PMI data and instead focus on the more positive idea that the Federal Reserve may still be eyeing a less aggressive approach when it comes to its policy tightening agenda. The bears may have won out by the end of the day with the Hang Seng ultimately ending in negative territory, but the bulls are having another go as the week continues. As a result, Monday’s one day vol print came in at 49.35% against 40.48% over the month.
Having traded down at seven-month lows last week, US Natural Gas prices continue to march higher, with yesterday’s news of rising exports adding 10% to the underlying price. This is being driven by one major export plant coming back online and another being tipped to follow in the next couple of weeks, driving volatility on the contact as a result. The one-day print came in at 90.08% against 69.88% on the month.
Sticking with commodities, Wheat prices also surged following the suspension of Black Sea exports. We’re still significantly below the levels seen in the Spring and global grain supply conditions have arguably improved since then, too. One day volatility on US Wheat was recorded at 53.25% against 40.54% on the month.
And finally, Cannabis stocks have been back in focus, following comments from US lawmakers that indicated the country might be getting closer to relaxing banking rules that would allow legal operators in the sector access to banking services. This falls some way short of the legalisation at a Federal level but shows that solid progress is being made. One day vol on CMC’s proprietary basket of licensed marijuana growers came in at 165.72% against 125.42% on the month.