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European markets slip back as Fed looms

Federal Reserve

 

After two days of modest gains European markets have slipped back ahead of this afternoon’s eagerly anticipated Federal Reserve rate decision.

Europe

They haven’t been helped by some poor manufacturing PMI numbers from Italy, France and Germany which all fell deeper into contraction territory than had been expected, as higher inflation constrains demand.

We’re also seeing some of the froth blown off some of the gains that came about from this week’s story about China looking to put together a “reopening committee” which has seen the basic resources and energy sector slip back.

We’ve also seen Ocado give back some of yesterday’s outsize gains that came about because of news of its partnership with South Korea’s Lotte Shopping.

On the plus side, Next shares have seen a decent uptick after announcing a better-than-expected Q3 trading update. Full price sales saw a rise of 0.4% during the quarter with the retailer maintaining its full year guidance for profits before tax at £840m. The resilience of the retail operation helped drive the sales improvement, rising 3.1% while online saw a decline of -1.9%.

GSK shares have also edged higher after reporting Q3 sales of £7.8bn and raised its full year guidance on sales growth to between 8% and 10%, and operating profits to between 15% and 17%. All three business divisions saw solid improvements, with vaccines seeing £2.5bn. speciality medicines, £2.7bn and general medicines £2.6bn. 

It’s been another disappointing set of Q3 numbers from Aston Martin with the shares sliding sharply after the company cut its delivery outlook for the year from a minimum of 6,600 vehicles to between 6,200 and 6,600, due to supply chain issues.

Q3 revenues rose to £315.5m pushing year to date numbers up to £857.5m, however while sales have been increasing so have losses. Losses jumped sharply during the quarter to £225.9m, pushing losses year to date up to £511m, with £245m of that caused by FX effects due to the weakness of the pound against the US dollar.

Wizz Air shares are also lower despite H1 passenger numbers of 26m, that easily beat forecasts. Revenues rose to €2.19bn which was in line with expectations, however the shares have fallen back after the airline said it planned to offer 35% more capacity over the next 6 months. This was a downgrade of the 40% originally cited with the airline blaming higher costs, as well as raised levels of economic uncertainty. This caution has also manifested itself across the sector with easyJet shares also falling heavily, along with more modest weakness for Ryanair and IAG.

US

US markets opened slightly lower after the latest ADP employment report showed that 239k new jobs were added in October, well above expectations of 185, further complicating the narrative when it comes to the Fed dealing with the problem of rising inflation, and a tight labour market. Wages also showed little sign of slowing rising by 7.7%, slightly down from 7.8% in September.

With most of the narrative leading up to today’s Fed meeting being one of a possible step down in the pace of rate hikes today’s data doesn’t encourage the belief that a signal to slow down the pace of rate hikes would be an effective one for the Fed to offer. While 75bps is the base case for today it’s what might come in December that is dominating the discourse, with the pressure coming from some high-profile Democrats like Elizabeth Warren chastising Jay Powell for the Fed’s current policy of raising rates at the expense of pushing the unemployment rate higher. Powell needs to ignore these sorts of intervention in the same way he pushed aside the noise from Trump when he was President.

Chipmaker AMD shares have pushed higher despite a mixed set of Q3 revenues and profits numbers. Revenues came in at $5.57bn, up by 29%,  while profits fell to $0.67c a share.

For the full year AMD said it expects to see annual revenue of $23.5bn while cutting its margin guidance to 52% from 54%. These numbers came off the back of a profit warning in October which saw the shares eventually hit a two year low before rebounding, and while the guidance isn’t great there is some relief that it wasn’ t worse.

Airbnb shares have fallen back after guiding that it expected Q4 revenue to come in between $1.8bn and $1.88bn, which is a sharp drop on Q3 which saw revenues of $2.83bn, an increase of 29% on the same period a year ago, and the best quarter ever. The Q3 numbers were impressive across the board, with gross booking value per nights up at $156.44, and profits above expectations at $1.79c a share. While Q4 generally tends to see a slowdown during the winter months the extent of the slowdown appears to have prompted a little bit of caution. 

New entrant to the streaming market Paramount Global has seen its shares tank after reporting Q3 revenue that came in short of estimates, coming in at $6.92bn with direct-to-consumer revenue falling short at $1.23bn. The number of Paramount+ subscribers rose to 46m which was below consensus forecasts of an add of 3.5m from Q2’s 43.3m.

While this is disappointing, the numbers are going in the right direction, it’s just the pace of the gains that are slightly troubling. Its biggest problem is that its entry into the streaming market in competition with the likes of Netflix, Amazon Prime and Disney+ seems like a streaming service too far when you consider that Apple is also spending huge amounts of money on online content. It’s not as if Paramount’s content isn’t good, it is, however they are coming at the market from a standing start and lagging well behind its more established peers and heading into a slowdown means that losses are likely to continue. 

The advertising revenue numbers from its TV network operations also fell short, falling 2% during the quarter so traditional TV networks are having to contend with lower company ad spend.

FX

The Japanese yen has continued to gain ground today after Bank of Japan governor Kuroda commented that he didn’t see the need to alter the central bank’s current policy settings now, when it comes to yield curve control, but that it might become necessary if inflation continues to pick up. While that might come across as a statement of the obvious, (it is) markets have taken to mean that a change might be imminent.

That seems unlikely now, with some of today’s yen strength probably more a symptom of caution ahead of tonight’s Fed meeting and the fact that Japanese markets are closed tomorrow.      

Commodities

After yesterday’s rather frothy gains, crude oil prices initially slipped back, with the US dollar broadly mixed ahead of tonight’s Fed meeting, which could be much ado about nothing, but could offer clues as to whether we see another big rate rise just before Christmas. Prices have started to edge back up again on chatter of a possible Iranian attack on Saudi Arabian infrastructure. 

Gold prices have pulled back off their highs of the day, alongside yields which have pulled back from their lows of the day. Any indication of a hawkish lean from Powell is likely to see gold slide back towards its recent lows.  

Volatility

It’s a case of more of the same as the new trading month gets underway. Price action in CMC’s proprietary basket of cannabis shares remains elevated after a degree of profit taking saw some of Monday’s bumper gains being eroded. One day volatility on the instrument was recorded at 142.86%, up from 125.17% on the month.

In terms of cryptos, again it’s Avalanche that remains ahead of the pack after the digital asset pared gains from its recent test of multi week highs. One day vol here came in at 68.38% against 54.7%, whilst CMC’s All Crypto Index was also seeing elevated levels of action, with daily volatility printing 77.95% against 48.46% for the month.

The Hang Seng index continues to power higher as bargain hunters attempted to look beyond the slowing Chinese economy and instead pinned their hopes on a softer monetary policy stance emerging at some point early next year from the Federal Reserve – even if another 75bps rate hike is on the cards for today. One day vol on the Hong Kong index came in at 54.35% against 41.77% on the month.

And Natural Gas is dominating in commodities once again. The underlying slipped back here after a slew of comments from various sources noted that there wouldn’t be shortages in Europe this winter and that prices are tipped to fall. The US Nat Gas contract now trades broadly unchanged from a year ago with daily volatility of 86.59% compared to 70.29% on the month.


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