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ECB rate-rise chatter sends markets into the red for the week

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European markets have ended the week very much on a downswing as yesterday’s big sell-off in the US has rippled over into today’s price action, pulling markets into negative territory for the week, with the DAX set to finish lower for the fifth week in a row.

European update

The FTSE 100 has also had a disappointing week, sliding to a one week low, with the energy sector saving it from a worse fate with both BP and Shell finishing the week very much on the front foot, after their strong numbers earlier this week.

Rate-hike talk has dominated this week, with the Fed raising rates by 50bps, with more to come, the Bank of England hiking rates by 25bps, and now several ECB officials have started raising the prospect of following suit in July, in comments made today in response to concerns over higher prices to help anchor future inflation expectations. These comments appear to have accelerated today’s weakness as the economic outlook starts to darken.   

Today’s price action has been dominated by weakness in consumer discretionary on concerns over weak demand as higher prices prompt a decline in consumer spending. Travel and leisure have also been caught up in today’s weakness with IAG the worst faller on the FTSE 100. The recent updates from US airlines painted a much more optimistic picture for US travel with Delta, United Airlines, and American Airlines saying they expect to return to profit this year, as business travel and leisure travel started to return to more normal levels of activity.

Of course, IAG faces slightly different challenges in that its domestic market is more fragmented in the form of its various different brands. Nonetheless, when the airline reported a €2.9bn loss at the end of last year, it said that while it didn’t expect to be profitable in Q1, that it should return to profit from Q2, assuming no further restrictions. Of course, the Russian invasion of Ukraine has put a spanner in the works, various IT issues, which have damaged its brand appeal, along with the various lockdowns and restrictions that have affected its Asia and China routes.

Today’s Q1 numbers have seen passenger capacity come in line with expectations at 65%, with an expectation of 80% for Q2, 85% for Q3 and 90% for Q4, with North Atlantic routes expected to be close to full capacity by Q3. Revenues for Q1 were €3.44bn, slightly above expectations, but below Q4’s €3.5bn, while operating losses narrowed to €754m, which was higher than expected, and appears to be weighing on the share price today, although the airline has maintained it expects to return to operating profit from here on in. The number of passengers carried was 14.38m, above estimates of 14m.

On a similar leisure theme, Holiday Inn owner IHG has reported revenue per room (RevPAR) rose 61% vs last year and is now back at 82% of 2019 levels. The Greater China region has proven to be a drag in March due to lockdown restrictions. By region, occupancy rates were at 60% in the US, 50% in EMEAA and 36% in Greater China, while the US outlook looks the most promising in terms of increased pricing power, with rates in the US business 4% ahead of 2019 levels.

Adidas shares have fallen back sharply after the sportswear company cut its full year operating margins from 10.5% to 9.4%, due to the slowdown seen in its China business. For Q1 operating profit fell 38% year on year to €437m, although this was above expectations while revenue came in at €5.3bn. The company also downgraded its expectations for the rest of the year.  This has prompted weakness in the likes of JD Sports.  

Dutch lender ING has seen its shares fall back after incurring significant costs on its exposure to Russian loans. The bank said it was taking €987m in loan loss provisions, as it posted a net profit for Q1 of €429m. Revenues came in at €4.6bn, slightly above expectations.

US markets & non-farm payrolls

US markets have continued where they left off yesterday, opening lower despite a pretty good non-farm payrolls report, with both the Nasdaq 100 and S&P 500 both breaking below key support levels of 12,700 and 4,100 respectively, raising the prospect of further heavy losses in the short to medium term.

A total of 428 000 new jobs were added in April, while the March figure was revised lower to 428k, so a nice bit of symmetry there. The unemployment rate remained steady at 3.6%, while the participation rate unexpectedly fell to 62.2% which is a little surprising. Average hourly earnings remained steady at 5.5% which suggests that for all the concern about a tight labour market and 11.2m vacancies, wage inflation remains subdued.

On the earnings front Under Armour has continued the theme of sports apparel makers warning about the outlook, after Adidas warning this morning, by saying that it expects to see a weaker than expected full year profit due to higher costs and supply chain disruptions. The company also posted a Q1 loss of 1 cent a share.

Virgin Galactic shares are also on the slide after reporting that it would have to delay the launch of its commercial space flight until Q1 2023, due to a lack of staff and supply chain issues.

Sports betting firm DraftKings on the other hand is enjoying a lift after its latest quarterly results after revenue came in better than expected, while raising its full year outlook.

FX update

Today’s US payrolls report has done nothing to shift the US dollar one way or the other, although it's still close to 20-year highs. The euro has enjoyed a bit of a respite as several ECB policy makers break ranks to argue that rates need to go up. Germany’s Nagel, France’ s Villeroy, Slovenia’s Vasle and executive board member Eldersen have all indicated that rates are likely to go up as they try to talk the euro up from its recent lows. The decline in the euro is exacerbating the inflationary impulse throughout the euro area, making it much more persistent.

The pound has continued to look weak with Bank of England chief economist Huw Pill doing little to assuage market concerns about the UK economy which he said he expects to stagnate in Q2, with the extra Platinum Jubilee bank holiday doing little to boost the economy. This seems rather an odd take as we’ll probably see a big jump in consumption spending as people go out and celebrate what should be a momentous day for the UK. Very much a case of “bah humbug” on the part of the Bank of England methinks: he should get out more!       

Commodities update

Crude oil prices have continued to drift higher this week, putting to one side concerns about Chinese demand and focussing on this week’s announcement by the EU of an embargo on Russian oil imports by the end of this year, though it looks like special carve outs will need to be created for the likes of Hungary, Slovakia and the Czech Republic.

The continued rise in US treasury yields, is continuing to act as a brake on gold prices moving higher, as the yellow metal languishes just above two-month lows. 

Volatility

The dual onslaught of rising recession fears and further interest rate hikes in both the UK and US appears to be dominating the agenda as the week draws to a close. Tech stocks have been especially hard hit, resulting in elevated levels of price action in multiple areas. The German Tech 30 index saw daily vol advance to 43% against a weekly print of 34%, while the NDAQ contract posted a similar trend of 39% versus 32%.

At a more esoteric level, shares in Boohoo continued to show heightened levels of movement on Thursday, following Wednesday’s disappointing results. The trend is however upward with bargain hunters presumably looking at the long-term potential here, rather than those immediate headwinds. The company certainly has a significant level of scale to fall back on, the underlying added 5.85% whilst daily vol printed 258% versus 130% on the month.

In fiat currencies, the kiwi dollar continued to lose ground over the greenback following the brief but notable gains off the back of the Fed’s rate call. Daily vol here sits at 21.94% against 12.22% on the month.

Finally rounding out with cryptos, the class looks comparatively subdued, although Tron is once again a standout. Gains from earlier in the week looked a little overdone resulting in a degree of profit taking during Thursday’s session. That does however look like a minor blip and overnight the uptrend is back in play once again. Daily vol posted 131% against 84% on the month.


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