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Markets slide on China concerns, while Italy whacks the banks

European markets have seen sharp falls today after the latest China trade numbers for July showed further weakness on both imports and exports. 

Europe

There was little to cheer in today’s numbers with exports sliding by -14.5%, the worst number since the pandemic, while a -12.4% plunge in imports pointed to continued weak domestic demand, and further economic weakness in Q3. The weakness in today’s trade data also don’t bode well for tomorrow’s July CPI data which could see China slip into deflation for the first time since February 2021. 

Basic resource stocks were the main victims of today’s disappointing numbers, with Glencore leading the way after the commodities giant reported a more than 50% decline in H1 profits.

Revenues were also weaker, at $107.42bn, down sharply from $134.4bn last year, while profits fell from $0.82c a share to $0.33c a share.  The company saw sharp falls in both its trading unit, and its mining business. The decline is mainly down to the sharp falls in commodity prices, as well as weak demand for some key materials. Trading volumes for zinc, nickel, aluminium was all lower, while copper was flat. Cobalt, which is a key battery component saw prices fall 59%.

Despite the weakness in basic resources, the FTSE100 has managed to hold up rather well, unlike markets in Europe which have fallen sharply, with the banking sector there also under pressure after the Italian government whacked an unexpected 40% windfall tax on bank profits for this year, which it is estimated could raise an extra €2bn of revenue.

This move has precipitated similar weakness in German, Spanish and French banks over concerns that the move by Italy could be adopted Europe wide, with UniCredit, Deutsche Bank, Intesa, Santander, and Paribas all sharply lower.

Also dragging on the FTSE100, Abrdn shares are the worst performers after the company saw assets under management for H1 slide by £5.2bn, dragging total assets under management below £500bn to £497.5bn. Fee revenue saw an increase of 3.6% to £721m, while adjusted operating profits came in at £127m.

On the plus side Holiday Inn owner IHG shares have pushed back towards the record highs of earlier this year, after reporting a strong set of H1 results. Total revenue for the period saw a 24% increase to $2.23bn, boosting operating profit by 62% to $584m. The company cited increased demand for travel in all its markets citing the fact the RevPAR had exceeded 2019 levels every month since July 2022, with Q2 RevPAR 9.9% ahead of those pre-Covid levels, although most of that will no doubt have been down to higher prices. Cost of sales and administrative expenses rose to $511m, while the company raised the dividend by 10%

The strong performance has been helped by the China reopening with business in the Greater China area seeing a 94% rebound in revenue per room, which on the face of it looks good but could be perceived as disappointing given the limited activity that we saw a year ago from covid restrictions and lockdowns. The US business continues to look strong with RevPAR up 11%. 

US

The weakness in European markets is translating into similar falls in US markets which are also sharply lower with its own banking sector finding the going tough after Moody’s ratings agency downgraded 10 smaller US institutions by one notch, as well as saying it was looking at the ratings of some bigger organisations. The action which included downgrades to M&T Bank and BOK Financial also saw Moody’s say they were looking at State Street and Mellon Bank, due to concerns over exposure to commercial real estate. 

Palantir shares are slightly lower after raising their profits forecast for 2023, as well as announcing a $1bn share buyback.  Q2 revenue rose to $533m, a solid increase from last year’s $473m, with revenue from government agencies rising 15%. For 2023 Palantir said it expects to see annual revenue of $2.21bn, with profits expected to rise to $576m. The company says its new AI platform will be at the forefront of its future strategy.

Paramount Globalenjoyed a better Q2 than it did in Q1 when it was forced to cut the dividend in the wake of a loss of $1.12bn. Q2 revenues came in at $7.62bn, with the direct-to-consumer business beating expectations, with revenue of $1.67bn The other areas of the business saw big falls from the same period last year when Top Gun Maverick boosted the numbers, however Q3 ought to be better with Mission Impossible Dead Recking part one. Paramount+ saw net subscribers rise by 700k to 61m. The company still slumped to an operating loss of $250m but it has finally managed to offload its Simon & Schuster operation for $1.62bn to KKR, a process it restarted at the end of Q1.

Vegan burger brand Beyond Meat’s fortunes have reset quite starkly from the enthusiasm of its IPO when the shares soared to $240. Now much lower and down heavily today in the mid-teens at around $13, having hit a record low of $10 in May, the company cut its forecasts for 2023 after Q2 results saw revenues decline 31% to $102.1m, with sharp falls in sales in its US and US food services businesses of over 40%. Internationally the business is doing better with a 8.7% decline in revenue to $41m. Losses were lower however the downgrade to annual net revenue to between $360m to $380m hasn’t been well received.

UPS is also seeing declines after the US parcel company downgraded its full year revenue forecast to $93bn from $97bn, while operating margins are expected to shrink to 11.8% from 12.8%. A part of this is down to a long-term wages agreement which could add $30bn of extra costs over the next 5 years.

Software companies were also having a difficult session after Datadog downgraded its full year outlook, which in turn weighed on the likes of Snowflake, CrowdStrike and Cloudflare all under pressure.  

After the bell we have the latest numbers from AMC Entertainment and Rivian.

FX

The US dollar has been the main gainer today as investors adopt an increasingly risk off position, with bond markets getting a haven bid helping to send yields lower, even as the US gets set to issue $43bn of 3-year notes later today.

The pound is in the middle of the pack against the US dollar, slipping back after 3 days of gains after 2 separate retail sales surveys showed that UK consumer spending slowed in July. This shouldn’t be altogether too surprising given the tough comparatives from last year when the weather was quite a bit warmer, and cost-of-living pressures weren’t as intense. Nonetheless while spending has slowed it’s also important to keep a sense of perspective.

The BRC retail sales numbers for July showed that like for like sales slowed during the month, rising 1.8%, well below the 3-month average of 3.3%. Food sales performed particularly well, but at the expense of online sales of non-food items like clothes which showed a sharp slowdown.

It is clear that consumers are spending their money much more carefully and spending only when necessary, as Bank of England rate hikes continue to bite on incomes.

With some consumers approaching a cliff edge as their fixed rate mortgage terms come up for expiry, they may well be saving more to mitigate the impact of an impending sharp rise in mortgage costs in the coming months.

That said in a separate survey from Barclaycard, spending on entertainment saw a big boost of 15.8% even as clothing sales declined.

Bars, pubs, and clubs saw a pickup in spending as did the entertainment sector as Taylor Swift did for July, what Beyonce did for May. The release of a big slate of summer films may also have offered a boost with the latest Indiana Jones film, along with Mission Impossible Dead Reckoning, Barbie and Oppenheimer prompting people to venture out given the wetter weather during the month.

Commodity currencies are also feeling the pressure as copper and oil prices slide, with the Norwegian Krone, Australian and Canadian dollar all sliding back.

Commodities

Gold prices have slipped back on the back of a firmer US dollar, with the greenback getting a haven bias while Fed governor Michelle Bowman reiterated her weekend comments that interest rates need to rise further, although US yields don’t appear to reflect that hawkishness. US headline inflation is expected to see a modest increase in numbers released later this week, and while Bowman’s comments are boosting the US dollar bond markets appear less convinced that more hikes are coming.

Having hit 4-month highs very briefly yesterday, crude oil prices are down for the second day in a row, as recent concerns over tighter supply are overtaken by concern over how the Chinese economy is faring, after some dreadful trade numbers earlier today.   We could see further signs of deflation in tomorrow’s inflation numbers for July, with headline CPI set to drop into negative territory for the first time in over 2 years.

Copper prices have slipped to one-month lows on the back of the disappointing China trade numbers, as concerns increase that Q3 could be an even weaker quarter than Q2 for the Chinese economy.

Volatility

Sugar prices saw modestly elevated levels of price action on Monday as traders attempted to price in several sets of fundamentals. These included news of ample supply in India and concerns over production in Thailand. Prices still sit towards the lower end of the recent range with one day vol on the raw sugar contract coming in at 42.5% against 37.26% for the month.

Activity for fiat currencies looked subdued but there were some outliers in cryptos. Bitcoin cash advanced as much as 10% at one point on Monday although still sits below the year-to-date highs posted around five weeks ago. One day vol on BCH/USD stood at 80.09% against 63.38% for the month.

Equity indices were also left looking rather calm on Monday. The outlier was Italy’s MIB, although the underlying made little net progress over the course of the day. One day vol printed 21.17% against 15.72% for the month.

CMC’s proprietary basket of 15 US gold producing stocks found itself in focus yesterday with recent earnings news seemingly weighing on some constituents. Losses on the session were limited but some big swings were observed in early trade. One day vol came in at 39.85% against 34.09% for the month.

 


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