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European markets set to break 6-day losing streak, Fed up next

St. Pauls and London skyline

European markets have enjoyed a welcome respite today, after six days of losses, driven largely by the news that the ECB was looking to speed up work on a crisis tool to deal with concerns about fragmentation in EU bond markets, and Italian bonds.

Europe

The FTSEMib has been the standout gainer because of these reports, leading the rebound higher, however we’ve also seen some decent moves in the rest of Europe’s markets, as we look towards this evening’s Federal Reserve rate meeting where it is widely expected the Federal Reserve will raise rates by either 50 or 75bps.

On the FTSE100 we’ve seen broad based gains primarily driven by consumer discretionary and financials, both of which have seen some big falls in recent days. 

B&M European retail shares are higher after being upgraded by Barclays. With the shares just above two-year lows Barclays have said that B&M’s status as a discount retailer should hold it in good stead given most of its sales come from essential products like groceries and cleaning products.

London Stock Exchange is also higher on a broker upgrade, this one from UBS citing a decent risk/reward with the shares just above 3-month lows.

Premier Inn owner Whitbread is seeing some decent gains after reporting Q1 sales well above expectations, as the travel sector reaps a reopening dividend, compared to a year ago.

The UK hotels saw accommodation sales rise 235.6%, ahead of last year and 31% above 2020 levels. UK like for like sales were also higher by 21.3% from the same levels in 2020, although food sales were lower by 4.3%.

Given the challenges facing the UK economy this is a decent performance, and while management have pledged to spend a further £20m to £30m on labour costs, and investment in 2023, the shares are having a decent session. This appears to be due to optimism that the performance in Q1 can continue into Q2 and deliver a strong H1 performance.

Also, in the travel and leisure space WH Smith shares are also doing well due to outperformance in its stores at transport hubs like airports, which helped boost sales up by 123% of the same period in 2019, pre-pandemic. Sales at railway stations were also higher, although high street sales were lower.  

Ocado shares are also rebounding strongly, although some of that is probably down to some bargain hunting having dropped 15% over the last four days.

On the downside the energy sector is underperforming, as a drag on the wider market, with BP and Shell both trading weaker.

BP is also in the news after agreeing to take a 40.5% stake in the Asia Renewable Energy Hub located in Australia. The hub is expected to be a key supplier of green hydrogen to markets across Asia, including Japan and South Korea.

US

US markets opened higher despite US retail sales declining -0.3% in May, while the April numbers were revised down to 0.7%.

These numbers were worse than expected and point to a US economy that appears to be weaker than thought. This should give the Fed pause if it is considering an outsized hike of 75bps later today. It is becoming apparent that for all the noise about higher prices, that Friday’s higher than expected CPI print might be an outlier, which means the Fed could rue being too aggressive.

On the companies front the weakness in crypto continues to act as a drag on Coinbase and other crypto related companies. MicroStrategy, on the other hand is seeing some early gains after bitcoin tried and failed to push below the $20k level, amidst concerns that if it were to do so the company might face some significant margin calls on its bitcoin holdings. 

FX

The US dollar has slipped back sharply heading into today’s FOMC rate decision, as traders pare back long positions ahead of this evening’s press conference. 

The euro initially saw a strong rebound off its lows after it was reported that the ECB was holding an emergency meeting to discuss the recent bond market turmoil, and specifically the sharp rise in Italian yields as concerns grow about fragmentation risk. These gains were tempered once it became apparent that it was unlikely the ECB would be able to deliver anything meaningful.

It’s also not a good look to announce an emergency meeting less than a week after you’ve already met to discuss policy for the upcoming months, as it gives the impression that you’re reacting to events rather than shaping them.

The pound has bounced back after hitting its lowest levels against the euro in over a year, and its lowest levels against the US dollar since March 2020. With the Bank of England set to meet tomorrow, there is increasing speculation that the MPC might need to hike by 50bps, much more than the 25bps currently being priced, as it looks to shore up the exchange rate, against the onslaught being wrought by the Federal Reserve. The central bank should be doubly concerned given that their 4 rate rises this year have reaped zero benefit.  

Commodities

Crude oil prices are on the back foot ahead of today’s US interest rate hike, with this afternoon’s latest economic data pointing to a slowing in the US economy, as retail sales slide by -0.3% in May, and the latest Empire manufacturing survey contracted for the second month in a row. The weakness in the data suggests that higher prices are now starting to affect demand. With demand already showing signs of weakness an outsized hike today could precipitate further weakness.

Gold prices are enjoying a welcome lift as US yields retreat from this week’s highs, ahead of today’s Fed decision.

Volatility

ATOS the French IT Services company has seen its shares in the spotlight this week and that’s now manifesting itself in terms of elevated price action. The CEO is to stand down, trade in the stock was halted temporarily amidst news of a restructuring and the French government has stressed it is keeping a close eye on activity given the strategic asset nature of the business. The underlying has lost almost 50% since the start of last week, with daily vol advancing to 417% against 152% on the month.

That heavy selling on ATOS dragged the French equity index into focus, which yo-yoed its way through the session, finishing down a further 1.2% and taking losses over the last five days to almost 9%.  Daily vol posted 43% against 25% on the month, although this continues to be eclipsed by its Italian counterpart which saw a daily reading of 50% against a monthly 26% yesterday.

Another significant slide in the US Nat Gas contract was seen yesterday, reportedly off the back of news that repairing damage to an LNG terminal in Texas will take many months. This seems somewhat counterintuitive, but it has driven prices in Europe significantly higher as a result. That’s the second big fall in the underlying in a matter of days, losses are more than 27% from the middle of last week and daily vol came in at 188% over 92% on the month. Arguably the repair timeline here is worth watching as a reversal may be seen once the terminal is restored.


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