It’s been a strong day of gains for European markets today with the moves higher being led by financials, as well as basic resource stocks, after the Federal Reserve soothed market concerns that they had taken their eyes off the ball when it comes to inflation risks.
Europe
The surprise decision by the Bank of England to raise interest rates has built on this narrative, and while the timing is curious, the decision has helped financials to post decent gains with the likes of Lloyds Banking Group, Barclays and HSBC posting decent gains, as yields moved higher.
A weaker US dollar has also helped boost metals prices, which in turn is helping to lift the basic resource sector, led by Rio Tinto and Antofagasta.
Airlines are also seeing a modest tick up along with the rest of the hospitality and leisure sector after it was reported that Chancellor of the Exchequer Rishi Sunak would be holding a virtual meeting with representatives of the industry to discuss possible support measures in light of the new Omicron recommendations. As a result, we’re seeing some modest gains for the likes of easyJet, IAG, JD Wetherspoon and Restaurant Group.
Aviva shares are higher after announcing that it would increase and extend its share buyback program to a maximum of £1bn from £750m.
On the downside defensives are seeing a downdraught with weakness in the likes of United Utilities and National Grid underperforming. On the other side of the Channel EDF in France has fallen sharply after it was forced to close two nuclear power plants over safety fears.
It’s not been a great year for Boohoo shares and this morning the picture got worse, with the shares plunging to a 5-year low, and down over 60% year to date, after the online retailer issued a profits warning, downgrading its expectations for net sales growth to between 12% and 14% from 20% to 25%. It also said EBITDA margins would be lower, due to higher-than-expected return rates.
The online retailer also said that it was having to incur higher than expected exceptional costs of £33m, compared to its previous guidance of £22.5m. This was always the worry for a business that did so well during the pandemic.
The reopening of ordinary retail along with its well documented supply chain issues appear to have tarnished its brand in the short term, not to mention concerns over the carbon footprint of these so called fast-fashion brands. Sector peer ASOS has also seen its shares fall sharply, slipping back further as all of its post pandemic gains slowly disappear. The shares are now back to where they were in April 2020, down over 50% year to date, as the fad for fast fashion continues to fall out of favour.
US
US markets picked up where they left off yesterday evening, opening higher, while weekly jobless claims ticked higher to 206k. Continuing claims on the other hand fell further, dropping to 1.85m.
Last night’s Fed decision appears to have removed a lot of the uncertainty leading up to yesterday’s decision with markets seemingly reassured that while inflationary pressures are rising, that central banks have the capacity to deal with them. The surprise decision by the Bank of England to nudge rates higher has done little to undermine this belief, with financials seeing the benefits of the last 12 hours.
Delta Airlines was amongst the early gainers after the airline said it was on course to be in profit for the current quarter, citing decent demand for travel over the winter months. Adjusted pre-tax profits are expected to come in at $200m as traffic levels recover to 74% of 2019 levels, above the 70% level previously guided. The gains proved to be somewhat short-lived however as the wider sector slipped back on travel concerns and rising Omicron rates.
On the downside Adobe shares have fallen sharply after the company projected guidance below market expectations for Q1 and its next fiscal year.
It's also worth keeping an eye on Apple’s share price in the event it moves to $183 a share which would put it beyond a $3trn market cap, though for now the shares are trading lower, as the Nasdaq lags behind, pulling US stocks off their intraday highs.
The latest numbers from FedEx and Rivian are expected after the bell.
FX
The pound surged to a three-week high against the US dollar after the Bank of England confounded expectations and raised the base rate by 15 basis points to 0.25%, by an 8-1 majority. It would appear that yesterday’s unexpectedly high CPI print has prompted the bank to take action over concerns that we could see CPI reach 6% by the end of Q1. It’s certainly a marked turnaround from the 7-2 vote against six weeks ago, which begs the question what changed.
While the move was largely unexpected, today’s move merely puts rates where they should have been if the bank had acted as many had expected they would in November. Maybe the IMF’s critique this week cut through, and touched a nerve?
Today’s move certainly doesn’t indicate that the Bank is about to set about on a hiking cycle, but what the events of the last 24 hours have taught us is that central bankers are now becoming increasingly concerned about the trend of price rises in recent months, and that these concerns outweigh the current worries over the slowdown being caused by tighter economic restrictions.
Once again, the focus shifts to how the Bank of England manages its guidance expectations, and again it’s a shambles. From only recently being told that policymakers were having second thoughts about raising rates, with external member Michael Saunders comments earlier this month, we had his colleague Catherine Mann saying at the end of November that it was too early to talk about rate hike timings, much less by how much and here we are just over two weeks later, and she’s voted for one.
Nonetheless while the timing is once again questionable, if the bank had hiked in November and done nothing today, no one would have batted an eyelid. Once again, the conversation is about its communications strategy, or rather the lack of it.
The euro, on the other hand, has underperformed after the ECB left rates unchanged and President Christine Lagarde said that it was highly unlikely that the ECB would be raising rates in 2022.
Commodities
Crude oil prices pulled back their early day losses yesterday to finish the day higher, after the latest EIA inventory report showed that petroleum demand remained robust, hitting a record high, at the same time as national inventory stocks showing a larger than expected decline. Even with Omicron the expectation is that demand is likely to remain high over the Christmas and New Year period, further underpinning prices.
Gold prices pulled off two-month lows yesterday, after yesterday’s Fed decision has continued to gain ground on the back of a weaker US dollar.
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