In a complete contrast to yesterday’s large declines, European markets have rebounded strongly as we come to the end of a volatile and whiplash-inducing trading week.
Europe
At one point this week we were looking down the barrel of some fairly sizeable losses, however today’s rebound has helped mitigate most, if not all of this week’s losses, on both the FTSE100 and the German DAX.
Today’s recovery from the lows has been helped by a strong lead from Asia markets after Chinese banks cut their 5-year loan prime rates by 15bps, in an attempt to kick start an economy that is slowing sharply due to various covid restrictions. This morning’s move wasn’t entirely unexpected; however, it's difficult to understand how it will help an economy that is slowing by design, i.e., by a government that is deliberately crimping economic activity due to a restrictive zero-covid policy.
As we look back at this week’s worst performers it's notable that retailers have been hardest hit, with the likes of Tesco, Marks &Spencer, Currys and JD Sports down the most.
For today the best performers have included Royal Mail which got absolutely hammered yesterday falling to an 18-month low, after scepticism that it would be able to meet its adjusted operating profit consensus of £303m with downside risk, while at the same time meeting the expectations of its staff when it comes to their wage demands.
Darktrace, which saw a big fall earlier this week on reports that Chief Strategy Officer Nicole Egan was named in a fraud ruling relating to her role when she worked at Autonomy, has seen its shares rise sharply, helped by a decent set of numbers from US cybersecurity outfit Palo Alto Networks.
Retail has once again been a laggard, with Sainsbury, JD Sports and B&M European Retail underperforming, despite a decent April retails sales report which saw a rebound of 1.4%, more than offsetting a -1.2% decline in March.
US
US markets have taken their cues from today’s positive European market session, opening higher in a week that has seen them fail to crack the lows seen last week.
The gains have come despite there being little sign of any change in tone from this week’s hawkish shift in Fed policy with respect to rate rises. Despite today’s rebound US markets still look to be on course for their seventh successive weekly decline.
Today’s biggest movers have been Palo Alto Networks, who specialise in cybersecurity solutions, whose shares have risen sharply after reporting Q3 earnings numbers that beat expectations. Total revenue rose to $1.39bn, up sharply from just over $1bn, while losses narrowed to $73.2m. Full year revenues are expected to rise to $5.5bn, with Q4 sales expected to come in at $1.55bn. These results have helped offer a boost to Crowdstrike and Zscaler and Okta.
Another US retailer, Ross Stores has also cut its outlook and while not as well known as Walmart and Target, its shares have also plunged after the discount chain cut its full year outlook as Q1 results fell short of expectations. This has translated into weakness in the likes of Burlington Stores and TJX, owner of TJ Maxx.
FX
It’s been a bad week for the US dollar, sliding back the most against the Swiss franc, it is also down heavily against the pound and the Australian dollar, and on course for its worst weekly performance since early February. Increasing concern about a possible economic slowdown in the US economy has taken some of the lustre off a rise in the greenback, which has risen over 5% in the last three months.
The pound is set to finish the week on the up after UK retail sales in April rebounded strongly in April, rising 1.4%, while March was revised higher to -1.2%. Most of the improvement was driven by sales of alcohol and tobacco in supermarkets, while fuel sales also rebounded. Year on year retail sales growth declined -4.9%, however that needs to be set in the context of last year’s April surge as the UK was coming out of lockdown and shops were reopening. All in all, today’s numbers, while much better than expected, still pointed to a UK consumer that is low on confidence, and still has the capacity to spend when it wants to. The pound was also underpinned by comments from Bank of England chief economist Huw Pill which suggested that the central bank may well need to be much more aggressive on the rate front than their previously dovish rhetoric might suggest.
German PPI hit a new record high in April rising by 33.5% year on year, in a further sign that factory gate inflation in Europe is a much bigger problem for business than it appears to be in the US and UK. These continued elevated cost pressures will increase the pressure on the European Central Bank to look at raising rates at their July meeting.
It’s also been a choppy week for oil prices as the competing drivers of concern over supply disruption from Russia rub against concerns over demand due to China covid lockdown restrictions and slowing demand over rising inflation. Reports that Shanghai authorities are lifting some lockdown restrictions is helping to provide an uplift, however with infections rising in Beijing the prospect of a big rebound in economic activity looks fairly limited, even as China starts to buy discounted Russian supplies.
Gold prices have seen a strong rebound this week having hit three month lows a few days ago. The slide in the US dollar and lower US yields have prompted a bit of a short covering rally that could see gold prices post their first positive week since early April.
Volatility
US retail stocks remain very much in focus after that shake out earlier in the week off the back of earnings and recession fears. One standout however was Dollar Tree where the underlying reversed opening losses, finishing the day slightly higher in anticipation of next week’s earnings, along with the idea that the discount end of the market may have an easier ride in the months ahead. Daily vol sat at 320% against a monthly print of 111%.
CMC’s proprietary basket of Outdoor Living stocks also had another turbulent session, although price action was significantly more subdued than was seen during Wednesday’s trade. The big risk here remains that the sector will be seen as vulnerable to any slowdown in discretionary consumer spending, although it’s worth noting that the basket has been under pressure for the past six months. Daily vol sat at 109% against 81% on the month.
In commodities, Lumber prices remain turbulent with the underlying falling further during yesterdays’ session, but by all accounts, coffee is also proving to be of interest. In common with many other softs, prices rallied hard in the latter part of 2021 before straying into what looked like overbought territory. The challenge now however is determining the trade-off between expectation of a bumper harvest in Brazil against risk of crop damage from frosts and that seems to have been pushing two-way trade in recent days. The theme could well recur in the weeks ahead, daily vol on the US Arabica Coffee contract sat at 77% against 53% on the month.
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