It’s been a disappointing end to the week for stock markets in Europe, with the after effects from Wednesday’s Fed decision still reverberating, wiping out any prospect of gains in a week that saw new record highs for both the DAX and Stoxx600.
In what can only be described as choppy trading conditions, sentiment was given an additional knock this afternoon on the back of comments from St. Louis Fed President James Bullard who said he was leaning towards a US rate rise in 2022, much sooner than Wednesday’s changed “dots” of two by the end of 2023.
While Bullard may be not a voting member this year, he is a voting member next year, and as such his vote will count, furthering muddying the time line for markets as to when the Fed will move in response to inflation concerns.
This has given the US dollar an additional shove higher, as well as cutting the ground out from industrial metals, though oil prices have remained fairly resilient thus far.
Consequently, equity markets have fallen back sharply, with all sectors getting clobbered, with the FTSE100 moving back towards the lows this month, and the DAX following suit, as market confidence that the US central bank would look through concerns about slightly higher average inflation, taking a bit of a knock.
Tesco is amongst the biggest fallers despite posting Q1 sales that were better than expected, and against some pretty tough comparatives, despite UK sales rising to over £10bn. This seems a rather odd reaction given the challenges, as well as increased costs facing the sector over the past 15 months. It could be investors are disappointed that guidance was left unchanged in spite of such a good performance in Q1, or it could be that their expectations were unrealistic. It shouldn’t be forgotten that last year’s comparatives were tough given that supermarket shelves were almost stripped bare in the aftermath of the first lockdown, and yet like for like sales were still higher.
Royal Dutch Shell and BP are underperforming despite oil prices that are resisting the stronger US dollar, with both near the bottom of the FTSE100, while banks have slipped back as short-term rates rise and longer-term rates come down, flattening the bond curve, with Barclays being the worst performer.
AstraZeneca shares are outperforming after the EU lost its legal action over vaccine delays, with the EU court stopping short of forcing the company to accelerate its vaccine delivery schedule. The court did require it to deliver an additional 10m doses over what it had already delivered, by September, making a total of 80m.
US markets have also opened sharply lower on the back of the Bullard comments, though the expiry of various index futures and option contracts expire is probably not helping.
The Dow looks set to post its worst week since January, and even the Nasdaq, which closed higher yesterday, has also fallen back as we head into the weekend.
US banks are under pressure due to the narrowing of bond spreads with American Express, JPMorgan Chase, Morgan Stanley and Citigroup all lower, as US short term rates start to become unanchored and move sharply higher, the US 2 year hitting a post pandemic peak of 0.266%, and breaking above the 0.2% level that has capped it for the last 12 months or so.
The US dollar has continued its advance today hitting two-month highs against a basket of currencies, and its best weekly performance this year. The Feds hawkish tilt has continued to reverberate across markets, with the move possibly being exacerbated by some end of week position adjustments.
The pound has come under pressure today after retail sales for May surprisingly slipped by 1.4%, despite the further relaxation of restrictions as indoor dining resumed along with the reopening of cinemas, missing expectations of a rise of 1.5%. It was all the more surprising given last weeks outperformance from BRC retail sales. The decline also needs to be set in the context of two really strong prior months of 5.4% and 9.2%, while the weather at the start of May was also pretty ropey, which may well have also impacted consumer sentiment.
While oil prices continue to look well supported hitting new two-year peaks, other commodities haven’t had as good a week. Metals prices have slipped sharply in the wake of the US Federal Reserve’ s shift on its rate expectations timeline, which has helped the US dollar rebound strongly, with gold, silver platinum and palladium all lower.
We’ve also seen big drops in commodity prices more broadly, not only in metals, but also agricultural commodities with corn, wheat and soybeans seeing further falls from their May peaks.