It’s been a broadly negative start to the week for markets in Europe although the CAC 40 has outperformed after president Emmanuel Macron returned a higher-than-expected percentage of the vote in the first round of voting, in the French presidential elections over the weekend.
Europe
This better-than-expected outcome also had the positive effect of providing an uplift to broader French assets, as investors presumed that a Le Pen victory had become less likely, although that belief could well turn out to be premature, given how unpopular Macron is with certain sections of French society.
We already know from previous experience that nothing is certain until the final vote is counted, and in the case of the French President, Macron’s re-election may not be the slam dunk many think it is given how much of the country dislike him over his government’s response to the gilet jaunes protest, as well as some parts of its Covid response. Ultimately the final result will come down to who French voters dislike the least which seems to be par for the course in politics everywhere these days.
Also providing a lift to the CAC 40 is French bank Société Générale after announcing it had managed to sell its Russian unit Rosbank, to Moscow-based lender Interros Capital while also taking a €3bn write down on the business.
The FTSE 100 has also had a poor start to the week with the decline in oil prices weighing on the energy sector as concerns grow about a sharp drop in demand in China, as a result of the draconian covid restrictions being implemented in Shanghai.
Concerns about rising energy prices are front of mind for investors this week with the latest CPI inflation reports for the UK, Germany and the US due tomorrow and all expected to hit multiyear highs, thus putting further pressure on central banks to tighten policy faster.
On the plus side, a pickup in passenger numbers through Heathrow in March, to their best levels since the pandemic began, has given the likes of IAG a lift, despite the various covid related problems being experienced at UK airports. easyJet shares are also higher, as is Rolls-Royce as optimism over the summer holiday season acts as a boost to wider sentiment.
US
US markets have taken a move to the downside against backdrop of a continued rise in yields, a stronger US dollar, and increasing concerns about the inability of Chinese authorities to deal with the new variant of Omicron and increasing resistance to measures to control the outbreaks. We also have the small matter of the US CPI for March due tomorrow which is expected to move through 8% for the first time since the early 1980’s.
Twitter shares have slipped back after it was reported that Tesla CEO Elon Musk wouldn’t be joining the board after all. This may have more to do with the fact that were he to do so he would be limited to owning no more than a 14.9% stake in the business and perhaps wanted to keep his options open to increasing his share to above that amount if some of his suggestions to reform the business weren’t acted upon.
Call of Duty maker and Microsoft target Activision Blizzard has said that it won’t be providing any Q2 guidance when it releases its Q1 results in two weeks’ time. The Microsoft acquisition is set to complete at the end of Microsoft’s fiscal year ending June 2023.
Chipmaker Nvidia has seen its shares drop sharply as concerns over demand for its consumer graphic cards in the wake of the sanctions on Russia as well as worries that inventory levels in this segment may already outweigh potential demand. Concerns about supply chain disruption in China aren’t helping sentiment either, although not all investors are negative on the stock with data centre revenue expected to remain strong.
FX
The pound has continued to look soft after the latest industrial and manufacturing production data for February showed an unexpectedly sharp drop off in activity, as concerns over the UK economy cast doubt on whether the Bank of England might be able to raise rates next month. We once again slipped below the 1.3000 area, however the move didn’t last long before recovering back above this key support level.
The euro has outperformed after President Macron won a bigger proportion of the vote in the first round of voting in the presidential election over the weekend.
The Japanese yen has continued to come under pressure against the US dollar, moving to within touching distance of its highest levels since 2015, and the potential to move above 125.90 and an almost 20 year low, as the gap between US and Japanese yields continues to widen out, although we still remain well shy of the spread differentials seen in 2018.
The US dollar has maintained its broader resilience ahead of tomorrow’s widely expected March CPI release which is expected to see US headline CPI move well above the 8% level for the first time since the 1980’s.
Commodities
Weakening demand out of China as the authorities continue to persist with their failing zero covid policy is pushing Brent crude oil prices further to the downside, below $100 a barrel, on the back of another negative week for prices. This concern is no better illustrated by traffic at Shanghai’s two main airport hubs which has collapsed below the first lockdown levels seen in early 2020. On the plus side, the slowdown in China, while worrying news for the global economy, is welcome news for the hard-pressed consumer who is being hit hard by rising fuel costs.
Surging yields and a strong US dollar don’t appear to have taken the lustre off gold prices which have retested the resistance level at $1,965, while palladium prices have jumped to their highest levels in two weeks on the back of Friday’s ban on newly refined platinum and palladium from Russian producers.
Volatility
Shares in NVIDIA have offered some interesting focus in recent days, with the semiconductor manufacturer’s stock having declined close to 20% since the end of last month. Two key fundamentals have been in play here, namely concern that demand for microchips amongst PC manufacturers may not be as strong going forward as had been hoped for, along with that talk of Fed policy tightening hitting growth stocks across the board. By Thursday, daily vol had advanced to 151% against a monthly print of 110%.
It’s been another week of relatively benign conditions for equity indices, but our proprietary share baskets have offered some fresh direction here. Most notable was the cyber security basket and with some suggestions that the sector had become a little overcooked as a result of big tech making acquisitions earlier in the year, that news from the Fed again triggered something of a correction. The contract lost as much as 5% off the back of the news, sending daily vol by Thursday to 58% against a monthly reading of 46%.
Over with commodities, livestock, in general, has been the stand out trade, with Lean Hogs again outperforming in terms of price action. We had that key report on 31 March which showed a tighter than expected herd but still resulted in opportunistic profit-taking. However, with supply expected to remain constrained into the summer, this has resulted in fresh bidding for prices higher. With no quick resolution to the fundamental issue here, the trade may remain in focus for some time yet. Daily vol on Lean Hogs sat at 84% on Wednesday, up from a monthly print of 70%.
Rounding out with digital assets, Dogecoin has remained in focus following that investment by Elon Musk into Twitter. As we’ve said previously it’s very much a vague dotted line between the two entities here and despite the early gains being largely reversed, price action has continued to be somewhat upbeat on Musk’s pet crypto. By Wednesday, daily vol was 160%, up from 83% on the month, but by Friday daily vol had slipped back to 92%.
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