Europe
European markets have struggled today, opening lower on the back of the reports of the two Russian missiles which crash landed in Poland, and killed two people in the process.
It quickly became apparent the incident wasn’t a deliberate act, and the explosion was likely caused by a Ukrainian air defence missile, that was launched in response to a Russian missile attack.
Despite the clarification from the Polish President, as well as NATO, tensions have remained high with concerns over an escalation still very much front of mind.
A higher-than-expected UK inflation number was also a reminder if any were needed that continued sticky inflation was likely to be a significant drag on future earnings potential, not only in the UK, but also in Europe where it is just as high, and in a lot of cases much higher.
BAE Systems is higher on reports that the UK government has sent the defence contractor a letter of intent to build new production lines to increase supplies of artillery shells, specifically 155mm howitzer rounds.
Accountancy software company Sage Group is higher despite reporting full year operating profits of £377m, which was slightly short of estimates of £382m. Organic revenue rose 6% helped by a 9% increase in recurring revenue. On guidance the company was more positive saying that operating margins are expected to trend upwards along with growth in recurring revenues.
Deliverooshares have slipped back sharply after the company took the decision to exit its Australia operations.
With concerns about a windfall tax rippling across the industry SSE results were always likely to be a focus for those who think energy providers are benefitting from windfall profits because of high energy prices. The company reported a 221% increase in adjusted profits before tax of £559.4m, mainly driven by the increase in gas prices, however its renewables business acted as a drag due to lower wind volumes forcing it to source power at higher prices to meet demand. Although adjusted profits were much higher, the actual numbers saw the company post a £511m loss due to volatility in the price of some of its forward contracts.
Delays in the construction of its Seagreen offshore wind project mean it won’t be operational until summer next year. Full year guidance was left unchanged with the company pledging to spend £2.5bn on capex.
We’ve also seen significant falls in consumer discretionary shares after this morning’s red hot inflation numbers, with the likes of Ocado leading the way, along with JD Sports, Next and Kingfisher.
Housebuilders are also lower after house price growth slowed to 9.5% in September, and inflation hit a 41 year high, with the Persimmon, Taylor Wimpey and Rightmove underperforming.
US
US markets opened lower after US retail sales for October came in above expectations, rising 1.3%, after a flat reading in September. This strong number appears to show that consumers are still spending, a trend that was supported in Walmart’s numbers yesterday, although as can be seen in Target’s numbers today, the strength appears to be patchy, and is weighing on sentiment in early trade today.
While Walmart managed to beat expectations in its Q3 numbers yesterday, helping to push the broader retail sector higher, they also helped to raise the bar for everybody else.
This appears to have been premature if today’s Q3 numbers from Target are any guide and having seen the shares hit their highest levels since August yesterday, Target shares have plunged today after seeing profits halve from the levels a year ago.
Having missed the mark in Q2 on both revenues and profits, Target have missed again today on profits, which came in at $1.54c a share, well below expectations of $2.13c a share. On revenues the company was able to beat expectations, with $26.52bn, however profits halved from the $3.04c a year ago. Inventory levels were also high, as consumers pared back spending on discretionary items like apparel and electrical items. Having missed on profits Target also cut its guidance for Q4, projecting a modest single digit decline in sales, while expecting operating margin of around 3%.
This divergence between two of the US’s biggest retailers, raises the question as to which retailer is the outlier and which best represents the US consumer, Walmart, or Target?
After the bell we have numbers from Cisco and Nvidia.
Ever since Cisco posted a profits warning in May the shares have struggled to recover with the shares hitting their lowest levels since November 2020, back in October. We’ve seen a modest rebound since then, however the company has previously stated that the effects of supply chain disruptions, alongside problems in China are impacting its margins. Q4 revenues came in at $13.1bn, which was flat year over year, while profits came in at $0.83c a share. On a full year basis revenue rose by 3% to $51.6bn. The supply chain disruptions which the company cited in Q3 didn’t prove to be as challenging as originally thought. For the new fiscal year Cisco said it sees Q1 revenue growth of between 2% and 4%, which was above expectations, while profits are forecast to come in at $0.83c a share.
Back in August Nvidia slashed its revenue outlook to $6.7bn while saying it expected gross margins to fall to 43.7% from 65.1%, potentially impacting profits as well. The downgrade was attributed to a big drop in gaming revenue which is down 44% from Q1, to just over $2bn. Its Q2 numbers confirmed that downgrade to guidance, with profits coming in at $0.52c a share and revenues coming in line at $6.7bn. For Q3 Nvidia was equally pessimistic about revenues, downgrading their outlook to $5.9bn, a big drop from estimates of $6.92bn suggesting that the slowdown in sales was likely to continue.
FX
It’s been another challenging day for the pound after another surprise to the upside on headline inflation. We already knew that today’s UK CPI numbers for October were going to see a sizeable increase, with grocery price inflation already in the mid teen percentages, however they still managed to come in above expectations at 11.1%, while core prices remained steady at 6.5%.
The main thrust of the move higher was the increase in the energy price cap which pushed household bills up by 11.7%, while grocery food price inflation rose to 16.5%, with big increases in the price of staples like milk, eggs, and cheese. While US inflation has been coming down since the summer, the same can’t be said for inflation here in the UK or across Europe, with the strength of the dollar protecting the US economy from the worst effects.
It's certainly not a pretty picture, however the UK is by no means the worst in Europe, given that inflation in Germany is higher at 11.6%, Italy at 12.6%, and at 16.8% in the Netherlands.
Today’s rise in headline inflation will also heap further pressure on the Bank of England to implement another big rate hike next month, with 50bps the likely outcome. Its also not good news in the context of tomorrow’s budget with the Chancellor expected to tighten the vice further with a host of tax rises, as well as spending cuts.
Crude oil prices are once again trading in a choppy fashion, having reversed course late last night on the reports of the explosion in Poland, they are back at the lows again after it was reported that Russian oil shipments through the Druzhba pipeline to Hungary had restarted. Iraq also said it was looking to increase oil production rates in line with global demand.
Gold prices have continued to look resilient above $1,770 an ounce, helped by yields which have started to drift off again.
Volatility
Wheat prices continued to advance from two-month lows during Tuesday’s trade with news that planting of the crop in Ukraine for next season was down by more than 40%. With tensions remaining high in the region, expectations are that food supplies in 2023 will remain constrained. One day vol on wheat came in at 48.76% against 40.62% on the month.
The Euro found some support yesterday off the back of confirmation that Q2 GDP growth estimates remained on track, although news of that missile strike in Poland served to quickly cap the upside here. EUR/USD traded in a range of almost one and a half cents, with one day volatility coming in at 16.82% against 13.39% on the month.
Crypto price action remains elevated but continues to show some signs of calming. One day vol on Bitcoin sat at 74.66% against 67.82% on the month, whilst the Emerging Crypto Index also saw heightened levels of interest, with the basket of less established altcoins printing daily vol of 96.96% against 91.02% on the month.
CMC’s proprietary basket of Cannabis stocks popped to fresh highs not seen in almost three months early in yesterday’s trade. Further signs of progress in Washington appear to be behind the support, although early gains proved to be unsustainable, leaving the basket to close up only a shade higher on the session. One day vol was 122.82% against 104.92% on the month.
