European markets have picked up where they left off on Friday with another strong performance, after Fed officials dialled back expectations of a 100bps rate rise next week.
While sentiment today seems a lot more buoyant, one needs to be careful before drawing too many conclusions from two consecutive strong sessions. Last week the DAX dropped to its lowest levels in 18 months before bouncing back, and is still quite close to that, so today’s gains may well be no more than another bear market rebound.
The FTSE100 has also seen a strong session driven predominantly by energy and basic resource stocks as metals price and crude oil rallies on the back of a weaker US dollar. Amongst the gainers we’ve seen decent gains for the likes of Harbour Energy, BP and Shell.
Rolls-Royce is also higher as the Farnborough Air Show gets under way, and the company announced progress on a hydrogen fuel aircraft project and other hybrid electric aircraft propulsion systems.
Today saw GlaxoSmithKline spin off its consumer healthcare business Haleon, and make its debut as a separate listed company at 330p, with the shares among the worst performers on the UK index today.
This completes the process that enables GSK to focus solely on the biopharmaceuticals side of the business as it looks to develop new vaccines and innovative medicines.
Haleon’s products range from the likes of Sensodyne toothpaste, as well as Advil and anti-indigestion tablets TUMS, which is just as well given that the valuation of £30bn is much less than the £50bn final bid by Unilever, which was turned down by the GSK board earlier this year. This makes the decision to hold out for today’s spin-off rather questionable, although Unilever will be relieved at dodging that particular bullet. The shares have fallen further on the first day of trading.
Admiral shares are also sharply lower again after sector peer Direct Line issued a profits warning, and both were on the receiving end of a downgrade from Jefferies. Admiral shares also dropped sharply last week over concerns that higher car repair costs would hit the sector's margins.
Deliveroo shares have recovered from early losses despite slashing its forecasts for sales growth this year, blaming customers for ordering less due to the rising cost of living. The company cut GTV from 15% to 25% to between 4% and 12% this year. This sent the shares sharply lower initially, however with the shares already close to record lows a lot of bad news is already in the price. Furthermore, the company kept its EBITDA guidance unchanged despite the predicted slowdown in growth, which is a silver lining of sorts.
US markets have got the week off to a strong start after the Friday rebound continued into the new trading week. With the Federal Reserve now in radio silence for next week's meeting, investors appear encouraged that a 100bps rate rise isn’t on the table after Fridays drop in University of Michigan 5-year inflation expectations to a one year low of 2.8%
After the big rebound in banking shares on Friday which was led by Citigroup, whose shares hit their best levels in over a month, attention today has seen us turn to the latest Q2 numbers from Bank of America and Goldman Sachs.
Goldman Sachs shares have led the way higher after trading revenue in Q2 rose 32% to $6.47bn, with strong beats on both FICC and equity trading of $3.61bn and $2.86bn respectively. This outperformance helped offset weaker than expected activity in investment banking, and equity underwriting, which came in light. In Q1 Goldman set aside $561m in respect of provision for credit losses related to growth in its credit card portfolio, and in this quarter is adding another $667m. Profits were also lower than Q1, coming in at $7.73c a share, but still managed to beat expectations of $7.05c. The bank said it is increasing its dividend by 25% to $2.5 a share in Q3
Bank of America shares have underwhelmed after reporting Q2 results slightly below expectations. Q2 revenues came in at $22.8bn and profits missed slightly at $0.73c a share. Investment banking fees were lower than expected at $1.13bn, while the trading division was mixed with FICC trading beating forecasts, coming in at $2.34bn, while equities fell short at $1.66bn.
The bank set aside $523m in respect of credit losses, along with $425m in respect of certain regulatory matters. This $425m saw expenses rise to $15.3bn a 2% rise from Q1. Part of this $425m appears to be related to a $200m fine related to the use of WhatsApp on unapproved personal devices. On the outlook the bank appears confident in the consumer outlook and is not planning to pause share buybacks.
We’ve also seen some decent gains in crypto stocks with the likes of Coinbase, MicroStrategy and Riot Blockchain all getting a lift from a sharp jump in Bitcoin and Ethereum.
The US dollar has continued its Friday slide, as the prospect of a 100bps rate hike next week continues to get priced out. The fall in long-term inflation expectations that we saw in last week's University of Michigan survey has taken some of the steam out of the recent surge in the greenback and with US policymakers now in black out we could see some welcome US dollar weakness.
The pound is amongst one of the main beneficiaries of this US dollar weakness, as it looks to carve out a base at its recent lows, and looks to move back through the 1.2000 area. The criticism coming the Bank of England’s way may also be helping with policymakers there coming under stronger scrutiny for being asleep at the wheel when it comes to assessing recent inflation risks.
US crude oil prices have rebounded back above $100 a barrel after President Biden came away from Saudi Arabia empty handed, as he urged the Saudis to increase output to combat higher prices. It shouldn’t have been too much of a surprise that his pleas would fall on deaf ears given that oil prices have fallen for five weeks in a row, last week hitting levels last seen prior to the Russian invasion of Ukraine.
Saudi Arabian officials went on to say that any decision to increase output was a collective OPEC+ one, and not something they could do unilaterally. Reports that Gazprom has declared force majeure on gas supplies to one European customer has also increased concerns over future fuel supplies, with Nord Stream 1 currently closed for maintenance.
Copper prices are also getting a welcome lift after hitting 18-month lows last week, with the weaker US dollar, helping to underpin prices.
Bitcoin prices have seen a strong rebound helped by the more buoyant tone in equity markets and the weaker US dollar. Ethereum has seen a much bigger rebound having dropped by over 70% at one point this month, falling to $1,000 at one point.
Firmer yields appear to be hindering upside momentum in gold prices with the lift due to a weaker US dollar not offering much in the way of comfort.
Shares in the US-listed electric vehicle maker Canoo dominated price action in equity markets last week, in the wake of an order from WalMart, followed by news that they may end up supplying the US Army, too. Daily vol hit 418% on Tuesday before moderating slightly to 345% by Thursday, against one month prints of around the 200% mark. The underlying share price has doubled since the start of July, but profit taking was again in evidence heading into the weekend break.
Looking at fiat currencies and the Kiwi Dollar found itself pushed into focus after the Reserve Bank of New Zealand increased interest rates. Whilst the 50-basis point hike was arguably expected, it came with a hawkish tone as to what happens next and the market used this as a trigger to book some profit off what increasingly looks like an overbought trade. On Wednesday, daily vol printed 21.74% against 13.63% on the month. The daily figure moderated slightly on Thursday but still topped the list at 18.97%.
Soft commodities have again shown some exaggerated levels of price action in the last few days, with both Cotton and Oats cash contracts being notable. The underlying story here still appears to be one of finding fair value after the spell of abnormal market activity. Cotton made a break below $100 for the first time since last September, driven by recession fears - but prompting suggestions that at such a price US farmers would abandon much of their harvest. As a result, a majority of the week’s losses were recovered, with daily vol peaking at 96% on Wednesday.
Similarly, the Oats cash contract has been active, ranging almost 10% on the week. The underlying is down by more than 40% from the highs tested earlier in the year, with questions being asked as to just how high a price the market can sustain. Daily vol on Oats hit 133% on Tuesday but remained above 100% by Friday, up by around a third from monthly readings.