It’s been another solid day for European markets as they look to reverse the losses of last week, rising for the second day in succession.
Europe
The gains of the past two days have come despite rising concerns over looming recession, as evidenced by recent sharp falls in commodity prices, which saw the DAX hit a 19-month low earlier this week.
A strong rebound in copper prices from 18-month lows in the last 24 hours, is helping the basic resource sector, with strong gains for the likes of Antofagasta, Glencore and Anglo American, after reports out of China suggested that the Ministry of Finance was considering allowing local governments to bring forward about $220bn of infrastructure spending from 2023, into the second part of this year.
The oil and gas sector is also on the up, on reports that the sector has secured some changes to the windfall tax announced by previous Chancellor Rishi Sunak a few weeks ago.
Offshore Energy UK, the industry body, said it had secured a change to allow firms to reduce the tax by spending on decommissioning on old fields, and investing in electrification of producing fields, helping to lift BP and Shell shares off 3-month lows. Shell is also being helped by its decision to revise up the value of its oil and gas assets, on the back of higher refining margins, as it generates higher returns from higher prices.
British Airways owner IAG is performing well after it was announced that a deal had been agreed to avert strike action with check-in staff at Heathrow, and which had forced the airline to cancel thousands of flights up until October.
On the other hand, JET2 shares have plunged after the airline announced that pre-tax losses had widened to £388.8m. The airline complained that a lot of its problems stemmed from what it called ill-prepared, and poorly resourced airports, and suppliers, as they struggled to cope with the sharp rise in passenger numbers.
The biggest drags on the FTSE100 today have been companies that have disappointed investor expectations on their most recent trading updates.
Starting with the construction sector, Persimmon shares have slipped to their lowest levels in two years, after the UK house builder reported it had sold 6,652 properties in H1, slightly below expectations. Total revenues fell to £1.69bn from £1.84bn a year ago reinforcing those concerns of a few weeks ago of a slowdown in the UK housing market.
Average selling prices have remained resilient, currently at £245,600 a rise of 4% a year ago, however rising costs and energy prices are proving to be a challenge.
It was also noted that some of the company’s plots were being stalled due to delays in the planning system which is delaying 120k plots in England.
Entain shares have also seen a sharp fall dropping to 18-month lows, after reporting that online net gaming revenue in Q2 dropped 7% due to lower rates of customer spend. The Coral and Ladbrokes owner said that most of the slowdown came in Q2 as opposed to Q1 which appears to suggest that the rest of the year could well see similar patterns in consumer behaviour. The company has reflected this in its guidance for its online business, which is expected to come in flat on the year. This weakness is also reflected across the sector with Flutter Entertainment also lower.
US
US markets look set for their fourth successive daily advance as they look to reverse last week's losses.
Last night’s Fed minutes showed little indication that there was any doubt that the FOMC was laser focussed on inflation to the exclusion of anything else. There was no mention of recession, or concern about a recession in any of last night’s commentary, in contrast to current market concerns about just such an outcome.
A 21% jump in Q2 revenue for Samsung, has seen the tech sector race out of the blocks in US trading today. The rise was driven primarily by strong demand for server chips, which outweighed weaker demand for phones, tablets and computers.
Consequently, we’ve seen the likes of Qualcomm, NVidia, Intel and AMD move higher.
GameStop shares have also jumped sharply after the company announced a 4 for 1 stock split.
After the bell we have the latest Q2 numbers from Levi Strauss. For the new fiscal year Levi said it expected to grow net revenues by 11% to 13%, to $6.4bn, and its Q1 numbers, back in April suggest the business is just about on course to do that, as net revenues rose to $1.6bn. Q1 earnings numbers saw profits of $0.46c a share, beating expectations of $0.41c a share. The weak economic outlook remains a key challenge to its ambitions of meeting its targets, given the recent profits warnings announced by a raft of US retailers, including Target, as well as Macy’s who stock Levi’s apparel, although sales from its own online store have been growing and make up for at least 39% of sales. As we look ahead to this week’s Q2 numbers, profits are expected to halve from their Q1 levels to $0.23c a share.
FX
Today’s focus has been mainly on the pound due to the political noise around the resignation announcement of UK Prime Minister Boris Johnson, as it looks to recover back above the 1.2000 level against the US dollar. Yesterday’s decline to 1.1875 and the lowest level since March 2020 has increased the risk of further losses towards 1.1500 in the short to medium term.
The strength of the US dollar has been one of the primary drivers behind this move given that sterling is higher against the euro which appears to be under greater pressure, having hit 20-year lows yesterday.
With the pound down over 12% over the last 12 months against the greenback, the main focus has been on the Bank of England and its approach to future rate rises with the MPC still seemingly divided on whether to be more aggressive. Comments from external MPC member Catherine Mann suggest she is in the more hawkish camp on this side of the debate, while chief economist Huw Pill is more cautious.
Today we’ve seen a modest rebound in the euro, but it still appears to have all the characteristics of a dead cat, now that the 1.0330 level has given way. Concerns about recession, as well as high energy prices are weighing on the single currency, along with doubts as to whether the European Central Bank will be able to act in a decisive enough fashion to raise rates to an extent which will combat inflation. Optimism over a tool to deal with fragmentation risk has been slowly diminishing amidst concerns that it may not be ready for when the ECB meets later this month.
Commodities
While recession risks appear to be rising the same cannot be said for commodity prices which have suddenly gone into freefall in the past few days.
Copper prices have rebounded modestly today, having fallen over 20% since the start of June, touching an 18-month low yesterday, after China said it was considering a $220bn stimulus program in an attempt to bolster an economy that is being battered by the government's zero-covid policy. While this has been welcomed by markets it seems a curious response given that China’s problems are currently self-inflicted. No amount of new spending will solve the problems of constantly shutting down and restarting the economy on the basis of a single case of covid.
Crude oil prices are also enjoying a modest respite today, after dipping below $100 a barrel, recovering from three-month lows with a slightly weaker US dollar prompting a pullback after the big declines of the last two days, with concerns about a global slowdown outweighing concerns about tight supplies.
Volatility
1Life Healthcare saw price action in its shares spike yesterday off the back of a takeover approach. The company has a market cap of around two billion dollars and the underlying advanced close on 25% off the back of the news, driving daily vol to 370% against a monthly figure of 170%.
Oil prices slipped noticeably yesterday as mounting recession fears weighed on the market. Brent crude did manage to hold above the $100 mark, but sentiment has clearly been rattled, with stocks across the sector coming under pressure as a result. CMC’s proprietary basket of oil and gas shares saw losses across all of its constituents once again, elevating volatility to 86% on the day versus 69% on the month.
As for commodities, Lumber is once again back in focus. Price cuts last week appear to have further stimulated demand, with the underlying finding some support after the long weekend. Prices remain well below levels seen earlier in the year and recession fears again could end up weighing here but daily vol sat at 216% against 137% on the month.
Activity across cryptocurrencies remains noticeably depressed with daily vol below monthly readings across the board, whilst for fiat currencies, renewed weakness for the Aussie dollar as investor shy away from risk assets saw daily vol on the Aussie- Yen cross advance to 16.54% against 15.44% on the month.
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