European markets have got off to a subdued start to the week, slipping lower after the latest economic data from China came in weaker than expected.
Basic resources and energy sector have borne the brunt of today’s uncertainty after July industrial production and retail sales both came in well below expectations. The bigger surprise is why anyone is surprised by this given China’s reluctance to relax its zero-covid policy, a policy that is likely to weigh on economic growth even more as we head into the winter months.
As the weather gets colder it’s unlikely that infection rates will go down, which means economic activity is likely to remain subdued, and consumer demand will remain weak.
In response to today’s data China’s central bank cut its medium-term lending rate by 10bps, to 2.75%, in a vain attempt to stimulate demand. This is likely to fail, simply on the basis that there is no demand to borrow, no matter where rates are. This lack of confidence stems from the Chinese government’s zero-covid policy, as well as a housing market where buyers are withholding mortgage payments on unfinished properties.
This pessimism over the Chinese economy as we head into the second half of the year, is manifesting itself in wholesale weakness in commodity prices, notably copper which is weighing on the likes of Antofagasta and Rio Tinto, while we’re also seeing weakness in iron ore, silver, platinum, and palladium prices.
Leading the risers is RS Group on reports that it could be subject to a £15 a share takeover bid over the weekend, although its not immediately clear where any bid might come from.
AstraZeneca shares are higher after reporting that its latest phase 3 trial of its Enhertu breast cancer drug showed that disease progression was significantly delayed, thus boosting the prospects that the drug may well get regulatory approval.
US markets have taken their cues from the weak tone from European markets, opening modestly lower, after the latest Empire Manufacturing survey for August saw economic activity fall off a cliff. The headline number fell from 11.1 in July to 31.3. New orders fell to -29.6 from 6.2, while prices paid also fell to 55.5 from 64.3.
Peloton shares appear to be holding onto the gains we saw on Friday after the company announced 800 job losses, as well as reversing a recent price cut on their bikes and treadmills. While investors might celebrate the restoration of margins, this seems like an unnecessary risk, at a time when their products are still hugely expensive and raising prices while consumer incomes are shrinking may not be the wisest course of action.
It is this pressure on consumer wallets that will be at the forefront of investor sentiment this week, with the latest quarterly updates from consumer bellwethers Walmart and Target who have both issued profits warnings in the past few weeks.
Disney shares have edged higher after it was reported that private equity fund Third Point, run by Dan Loeb, had taken a stake in the business, raising the inevitable question as to what changes he is looking for management to make to justify his interest. One angle is that the ESPN business could be spun off, while Disney should [pay up to acquire the rest of the Comcast stake in Hulu.
The US dollar has been broadly better bid today, after taking a bit of a pause last week, with this morning’s negative economic data from China, helping to deliver a broader bid to proceedings. Even an awful Empire manufacturing survey hasn’t dampened demand for the greenback, which appears to be benefitting from being the least bad option, ahead of the release of the latest Fed minutes on Wednesday.
The biggest fallers have been the commodity currencies of the Norwegian Krone, Australian and Canadian dollar, as weaker copper, and oil prices weigh on the wider market.
Crude oil prices are back at their lowest levels this month, after this morning’s economic data from China pointed to an economy low on confidence and held back by a covid policy that gives no certainty as to when business can get any certainty on when they can expect a return to normal.
The dark clouds of recession appear to be appearing when it comes to the global economy, with the latest China data, reinforcing those fears, which has prompted a sharp slide in metals prices. Copper and iron ore prices have led today’s weakness in commodity prices, as markets fret that China’s zero covid policy will mean that Chinese economic growth for the rest of this year will be sub-optimal.
Friday saw price action in GlaxoSmithKline’s shares increase markedly. The stock had been under pressure earlier in the week, evidently off renewed fears over litigation that is due to start against the company regarding side-effects of a now withdrawn heartburn drug. However, assurances that nothing material has changed here proved sufficient to initiate a reversion in sentiment. Daily vol came in at 127% against 50% on the month.
Cotton prices rallied hard into the weekend break, with the underlying adding around 5% in the last few minutes of trade. The move appears to have been driven by a downgrade in the yields which are being forecast by the USDA in their latest report, with the US market expected to harvest some 16% less than was the case a year ago. That puts the price of cotton back at levels not seen in almost two months, with daily vol of 68.09% against a monthly print of 55.05%.
Corn was also highlighted in that same USDA report, with distribution issues in Europe continuing to be seen as a challenge given Russia’s ongoing offensive in Ukraine. Prices here moved out to levels not seen since early last month, with the cash price having risen for nine successive sessions. Daily vol sat at 44.38% against 39.66%, although the situation was even more pronounced with the Oats contract, where daily vol advanced to 139% against 118%.