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European markets tread water ahead of the ECB next week

European markets look set to end what has been a challenging and predominantly negative week very much on a flat note. 

Europe

Investors are currently caught between two distinct pincers, concerns over slowing economic numbers, particularly in Europe and China, against a backdrop of much stickier inflation caused by rising energy prices.

With the ECB kicking off a round of central bank meetings next Thursday, followed by the Federal Reserve and Bank of England the week after, concerns are rising over the prospect of a policy mistake, which could undermine the prospect of an economic pickup into year end.

The ECB has consistently said any decision on rates would be driven by the data. Well, the data from Germany has been utterly dreadful this week and yet pricing for a rate hike next week is approaching 40%, which seems rather high. If you really are data dependent, then surely a pause is the way to go, otherwise how can anyone take your guidance with any degree of seriousness.

Consumer discretionary has finished the week on an upbeat note after SocGen upgraded the Next to a buy from hold, with a target price of 8,239p, while JD Sports has also received a lift on the back a belief that the recent decline is overdone, according to Berenberg.

On the earnings front housebuilder Berkeley Group said it expects to see profits split evenly between H1 and H2, confirming full year pre-tax profits guidance of at least £1.05bn, for this year and next year. The value of underlying sales this year is 35% below last year and will only invest very selectively in any new projects going forward due to the increasing economic uncertainty surrounding the UK housing market.

US

US markets opened more or less unchanged on the last trading day of what has been a negative week for the S&P500 and Nasdaq 100.   

Appleshares underwent another large decline yesterday, the second session in a row as markets continued to assess the impact of China's decision to ban the use of iPhones for government officials, as well as the emergence of a serious threat to its market share from Huawei who unveiled their own high spec phone earlier this week.

With the launch of a new iPhone 15 due next week at its “Wanderlust” event, any threat to its Chinese revenue stream, which accounts for 20% of its turnover, could well see recent share price weakness accelerate further.

DocuSign shares have had a disappointing time of it, its shares slightly lower year to date, despite seeing their recent quarterly numbers coming in better than expected. They haven’t really recovered from the weak guidance it issued at the end of last year. When DocuSign reported in June, its Q1 revenues came in comfortably ahead of the lowered guidance at $661.4m, while profits came in at $0.72c a share, with the company upgrading its guidance for Q2. Investors were still unimpressed, and yet DocuSign once again beat its guidance with revenues of $687.7m, an 11% increase, while profits came in at $0.72c a share. Just like they did in Q2, management have upgraded their guidance projecting Q3 revenues of $687m to $691m, as well as raising their full year forecast to between $2.73bn and $2.74bn, however the shares have still slipped lower.

Kroger is in the news after reporting that its merger with Albertsons is still going ahead but that they would be selling a combined 413 stores to CCS Wholesales grocers and Softbank, in order to help oil the wheels for getting approval for the deal. The Ohio based grocer also went on to report Q2 sales of $33.93bn and profits of 96c a share, while keeping its full year guidance unchanged.

FX

We’ve seen a little bit of Friday US dollar weakness at the end of a week that has seen the US dollar index post its best run of weekly gains since 2014, with the biggest losers this week split between the Australian dollar and the pound.

We’ve seen a bit of a shift in thinking this week when it comes to sterling after Bank of England Governor Andrew Bailey indicated that they were close to peak rate when it comes to further rate hikes. This comes across as a long overdue corrective to market pricing which at one point had a UK terminal rate above 6%.

With the ECB likely to take a pause when they meet next week, and the Federal Reserve looking certain to take a pause the week after, the pricing for a lower UK peak rate could come in further giving the BOE enough cover to take a pause as well.

The Japanese yen is likely to be in focus over the next two weeks after the verbal intervention to talk the yen higher earlier this week.

Commodities

Another week of gains for crude oil prices, which are now at their highest levels since November last year, after both Saudi Arabia and Russia confirmed that they would be extending their output caps from July into the end of the year. Given the continued weakness of economic data from Europe and China over the past few days there are risks to this approach which if overplayed could cause demand destruction in an already fragile global economy.

Gold prices have found themselves on the receiving end of a stronger US dollar this week, as the greenback gained further ground on the expectation that we might see one more rate hike from the Fed by year end.    

Volatility.   

Apple stock has been under pressure in recent days with news that the Chinese government was to ban officials from using the company’s phones at work. Shares are more than 5% down on the week, with one day vol on Thursday printing 46.65% against 31.14% for the month.

Keeping with tech and on a more optimistic note, Intel continued to extend its recent run of gains. The latest good news took the form of a foundry pre-payment with a chipmaker investing $300m in the business to aid production. One day vol sat at 70.51% against 51.88%.

In fiat currencies, price action was largely unremarkable but Sterling was something of an outlier after the Bank of England noted the end of its monetary policy tightening cycle may be in sight. One day vol on Sterling Aussie sat at 7.59% against 7.53% for the month.

Sugar keeps giving in terms of erratic price movements, reversing Wednesday’s slide and advancing back towards those three-month highs. It’s the same supply/demand imbalance that is dominating, but one day vol remains elevated at 45.57% against 43.19% on the month.

And CMC’s proprietary basket of Cannabis stocks continues to act as something of an outlier and despite recent gains being consolidated, volatility still remains elevated. The one-day print stood at 133.09% against 112% for the month.

 


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