A rebound in yields, as well as the US dollar appears to be weighing on European markets today after the latest inflation numbers in Europe saw headline prices surge in October, with German CPI surging to 11.6%, and Italy CPI rising by 12.8%.
Europe
Given yesterday’s slightly dovish interpretation of events out of the ECB yesterday, this is not what President Lagarde, and the Governing Council will want to see.
Today’s inflation numbers contrast to what has been a slightly softer tone from other central banks, with today’s US inflation numbers also offering something to both hawks and the doves.
This suggests that markets are likely to be less sure that the Federal Reserve will share the same caution about the size of their rate hikes, when it comes to their own rate hiking plans next week.
The DAX has managed to shrug off some disappointing numbers from Volkswagen who missed on their Q3 numbers and lowered their full year sales target on supply chain issues.
The FTSE100 is underperforming with banks leading the way lower after some disappointing numbers from NatWest Group.
NatWestshares are down heavily after reporting lower than expected Q3 profits of £187m, a sharp drop from the £1bn profit in Q2. The main reason for the profits slide was a loss of €652m on the discontinued Ulster Bank operations and the reclassification of the mortgage book, so is very much a one-off.
It is notable that NatWest has taken more aggressive action with respect to impairments.
In H1 impairments were a modest £26m, however today’s numbers have seen that provision increased by £247m, while operating expenses also saw a sharp increase in Q2, to just shy of £1.9bn, although they are still lower from a year ago.
Today’s weakness in NatWest has acted as a drag on the wider sector, with Lloyds and Barclays also lower.
We’ve seen good news from British Airways owner IAG today after Q3 adjusted operating profits came in at €1.1bn, while revenues beat expectations at €7.33bn, pushing above 2019 levels, despite operating at lower capacity.
The higher revenue level, while welcome, simply reflects higher ticket prices, with business travel back at 75% of 2019 levels. Profits after tax for Q3 rose to €853m. For the year-to-date IAG has managed to edge back into the black to the tune of €170m.
For Q4 capacity is expected to be at 87% of 2019 levels, with Q1 expected to rise to 95%. This seems a little on the optimistic side given the economic outlook, and perhaps explains why the shares have underperformed today.
On a more positive front Centrica shares are higher after reporting that its Rough gas storage facility had reopened helping to boost the UK’s energy resilience over the winter months. The facility is still operating at 20% of its previous capacity, and while will only add a few days it will eventually have the dual purpose of storing natural gas and hydrogen when all the work is complete.
US
Somewhat surprisingly last night’s disappointing reaction to Amazon and Apple results haven’t negatively affected today’s US open, with markets pushing higher in early trade, after US core inflation rose to 5.1% in September, slightly below expectations, but still above the levels in August. Personal spending rose by more than expected, by 0.6%.
On a more worrying note, pending home sales tanked by -10.2% in September highlighting how much damage high US rates are doing to the US housing market. We’ve already seen two central banks pare back the size of their rate hikes this month with the RBA and Bank of Canada hiking by less than expected, due to concerns about causing a lockup in the housing market. Will the Fed be forced to follow suit in due course, and signal a slower pace?
Amazon shares have fallen sharply after the company downgraded its guidance for Q4. Amazon estimated sales of between $140bn to $148bn for the pre-Christmas period, well below forecasts of $155.5bn. Part of the reason for the miss on revenue appears to be being blamed on FX effects, i.e., a strong US dollar. Costs have also risen sharply over the last nine months, currently at $355.27bn, up from $311bn a year ago, an increase of 14% year on year.
Amazon also said it could struggle to turn a profit for Q4, in a year that has seen the company register huge losses during H1 due to its stake in Rivian.
Apple’s shares in contrast to Amazon have seen a strong move higher despite some weakness in key areas. Overall Q4 revenue did beat expectations, at $90.15bn, helped by strong beats on Mac and Wearables, however on iPhone revenue this fell fractionally short at $42.63bn, as did services at $19.19bn, below $19.65bn. iPad sales also missed at $7.2bn.
Mac revenue was especially positive coming in at $11.51bn, exp $9.25bn, while wearables saw $9.65bn, against an expectation of $8.8bn.
The biggest worry for Apple will be the continued weakness in the Greater China region which saw revenues come in at $15.47bn.
Also doing well we’ve seen both US oil giants Exxon Mobil and Chevron post bigger than expected Q3 revenue and profits numbers, Exxon reporting EPS of $4.45c a share, or $18.68bn, a new record number while total revenue rose to $112.07bn. Exxon said it was boosting capex to $21-$24bn while also boosting the dividend to $0.91c a share.
FX
The Japanese yen is once again the worst performer today after the Bank of Japan kept its monetary policy unchanged. We’re also seeing today’s move higher in yields helping to push the US dollar up from its lows this week, although it’s not likely to be enough to prevent the US dollar closing lower for the second week in succession.
Amongst the best performers this week has been the pound which has rallied strongly on the back of a weekly decline in gilt yields, and is on course for its strongest monthly performance since July 2020.
Gold prices have slipped back on account of the rebound in the US dollar and yields more broadly across the board, with today’s sharp rise in October inflation pushing prices back to their lows of the week.
Crude oil prices have retreated from their highest levels in two weeks, helped by a rebound in the US dollar which has been in decline over the past two weeks.
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