European markets have had a more buoyant tone with the news that US House Speaker Nancy Pelosi has left Taiwan, for South Korea, leaving the heightened tensions of the last few days behind her, and the risk of a confrontation much diminished.
Europe
With those geopolitical concerns potentially behind us in the short term, attention has returned to earnings numbers both current and upcoming, although the FTSE100 is underperforming its European peers. It’s still notable that UK index is being led higher by resilience in tech and housebuilders, as well as modest gains for BP, Shell, and HSBC. Defensives are acting as a drag, with AstraZeneca, GSK and National Grid all slipping back.
Avast shares have also surged after the UK regulator cleared its acquisition by Norton LifeLock. The decision to look at the deal was a surprise to investors at the time, suggesting that the regulator may have had some concerns. The fact that it has subsequently cleared the deal has seen the shares soar.
Taylor Wimpey shares are also enjoying a welcome boost after reporting a solid set of H1 results, despite a 5.4% fall in revenues to £2.08bn.
The decline in revenues appears to have been offset by an improvement in margins from 19.3% to 20.4%, while profits before tax rose by 16.3% to £334.5m. The company went on to say that it expected full year profits to come in near the top end of expectations in the region of £905m, helping to offer a boost to a sector that has really struggled this year.
Despite the boost from today’s results which has seen Taylor Wimpey rise towards the top of the FTSE100, today’s gains haven’t offset the big losses seen yesterday.
Rolls-Royce shares are higher after the Spanish government approved the sale of ITP Aero for £2bn which will be used to boost the company’s balance sheet. Today’s news is also welcome in the context of tomorrow’s H1 numbers, where investors will be hoping for an improved outlook on its previous guidance of low to mid-single digit revenue growth, as well as expecting to be cashflow positive by year end.
US
US markets have also opened higher with the departure of Pelosi from Taiwan with attention shifting back to whether we are any nearer a Fed pivot than was thought to the case at the beginning of the week.
We’ve continued to see pushback on that line of thinking from a succession of Fed speakers, with the latest, St. Louis Fed President James Bullard, who pushed the idea of a Fed funds rate of 3.75% to 4% by the end of this year, and that current Fed policy was far from being restrictive. He also expressed optimism that the US would see positive GDP growth in the second half, and that he wants to see convincing evidence of inflation easing.
If Bullard truly believes that we’ll see an H2 rebound, he won’t have been encouraged by today’s July services PMI which was confirmed at 47.3. On the other hand, the latest ISM Services report saw an improvement from 55.3 to 56.7, while prices paid fell from 80.1 to 72.3. June factory orders also rose by a better than expected 2%. This divergence on the ISM relative to PMI rather muddies the waters as to how the US economy is performing, however one thing that isn’t in doubt is that prices paid are falling. They fell sharply in manufacturing, and have fallen in services, although that hasn’t been enough to take the edge off today’s uptick in yields.
On the earnings front we’ve seen a bit of a mixed bag, especially in relation to Starbucks which saw a strong performance from its US business, even as sales in its China business plunged due to various lockdown restrictions.
Nonetheless Starbucks shares have moved higher after Q3 revenues beat expectations, coming in at $8.15bn, a rise of 8.7%. Operating margins also improved, as did profits which beat forecasts, coming in at $0.84c a share.
PayPal shares have surged after the company announced a $15bn buyback program as well as posting Q2 revenues and profits above expectations. Q2 revenues of $6.81bn and profits of $0.93c a share as well as announcing that Elliott Investment management had taken a $2bn stake in the business.
The pain has continued for Robinhood Markets after the company released their numbers a day early, reporting Q2 revenues of $318m and a net loss of $295m. With full year operating expenses expected to be in the region of $1.7bn the company is haemorrhaging cash.
This has prompted another round of job losses on top of the 9% job cuts it announced in Q1, with a decision to cut 23% of its workforce, as it looks to stabilise the business as investors lose confidence in the business model. Unsurprisingly this has provided a lift to its depressed share price. That said it doesn’t change the challenging outlook for the business as investors mull the decision to focus more on crypto which has backfired spectacularly, with revenues in that business falling by 75% year on year. Monthly users have also slumped year on year, down from 21.3m to 14m.
Airbnb shares have fallen sharply after Q2 bookings came in below expectations. Having seen bookings in Q1 come in at 102.1m, hopes were high of a big jump in the face of the disruptions of the past two years. We did get an improvement, but it was modest in nature, rising to 103.7m, below expectations of 106m. Profits came in ahead of forecasts at $0.56c a share, with gross bookings totalling $17bn during the quarter, translating into revenue of just over $2bn, only the second quarter it has achieved such a feat, the last time being Q3 of 2021. For Q3 2022 the goal will be to surpass that record with $2.8bn of sales.
Chipmaker AMD has also seen its shares fall back after warning that lacklustre PC sales could hit its Q3 revenues. This shouldn’t have been a surprise given the weak outlook offered by Intel late last week. The company did well on Q2 revenues, a rise of 70% to $6.55bn, while profits were also good, rising to $1.05c a share. Its Q3 revenue forecast was greeted with disappointment with estimates between $6.5bn and $6.9bn.
FX
It’s been a subdued day for currency markets, with the US dollar continuing to push higher after yesterday’s gains in the wake of Fed officials pushing back on the dovish narrative coming out of last week’s Powell press conference. The move higher in yields in bond markets has continued after the latest ISM Services data for July showed a big improvement from June, while factory orders for June also rose more than expected.
Firmer oil prices are helping to support the likes of the Norwegian krone and Canadian dollar.
The pound is treading water ahead of tomorrow’s Bank of England rate meeting which expected to see the central bank hike rates by at least 25bps, and possibly even 50bps for the first time in its history.
Commodities
Brent crude oil prices pulled off two-week lows, after OPEC+ did the social media equivalent of trolling the US, by saying that they would add a pitiful 100k barrels a day to output in September. This is a rounding error in the wider scheme of things.
This move by OPEC+ is particularly embarrassing for the US given the awkward optics which were at play when US President Biden met Saudi Arabia’s MBS in an attempt to achieve a much bigger output hike. Is this a deliberate snub by OPEC+ or is the pitifully low number a direct consequence of an inability to pump any faster due to a lack of capacity. Perhaps we do need a recession to drove prices lower? Today’s inventory data saw a surprise build of 4.5m against an expectation of a draw of 1.4m barrels, so perhaps demand is waning?
Gold prices have slipped back in the face of today’s rise in yields and a firmer US dollar.
Volatility
Fears over the extent of any military response by China ahead of US House Speaker Nancy Pelosi’s arrival in Taiwan proved unsettling for many Chinese equities. That left the Hang Seng to fall notably on Tuesday, testing two-month lows as a result. Although the current situation appears calm, the move has undoubtedly riled Beijing and daily vol on the Hong Kong benchmark index found its way to 37.67% against 28.03% on the month.
An earnings miss from US listed Phantom Pharma saw its stock rattled during Tuesday’s trade, losing in excess of 25% during the session and returning to six week lows as a result. Daily vol advanced to 422% against 209% on the month.
A marked decline in Palladium prices was seen yesterday, with the underlying losing close on 10% at one point, left the precious metal marked up in terms of price action. Daily vol advanced to 70.16% against 57.37% on the month and although both gold and silver also tracked lower, losses here were far more modest.
USD/JPY trade staged something of a reversion yesterday after recent selling. However, a more hawkish tone was seen from the Fed and that seems to be galvanising a fresh round of support for the greenback. Daily vol on dollar yen printed 14.26%, down from some of the levels we have seen of late but still well up on the monthly 10.11%.
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