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European markets set to finish the week on the up, as oil prices slip back

Oil and natural gas platform

European markets have shrugged off a disappointing UK retail sales report for February and an absolute shocker of a German IFO business survey for March, which saw economic activity crater in the face of surging energy and producer prices, with the institute claiming that sentiment in the German economy has collapsed.

Europe

Today’s slide in oil prices is helping to offer a modest boost to end of week trading, and although weighing on the energy sector, we are seeing decent gains for tech, with Infineon leading the DAX higher.

As inflation continues to rise, and pressure on consumer incomes intensifies, it’s been notable that we’ve seen a clear differentiation between this week’s winners and losers, as price pressures start to bite. The rise in oil prices continues to benefit the likes of BP and Shell this week, while expectations of rising interest rates are helping to boost UK banks. On the flip side of that, as concerns about the cost-of-living increase, retailers and housebuilders have been feeling the pressure and sliding back.

Among the worst performers this week have been B&Q owner Kingfisher and Next, despite both of them reporting solid full-year profits, as concerns about the retail environment prompt questions about the outlook, although Next has received a lift from Soc Gen today, with the bank citing an attractive valuation.

The likes of Barratt Developments, Taylor Wimpey and Persimmon have also slipped back as rising rates and higher prices prompt questions about the durability of the UK housing market.

Today’s disappointing UK retail sales numbers for February and a slide in consumer confidence in March have served to reinforce the weak economic backdrop, and point to a decline in the ability of the UK consumer to match the spending patterns that we saw last year.

US

US markets look set post their second successive weekly gain, opening higher as concerns about rising rates appear to be being offset by optimism over the resilience of the US economy.

US 5- and 10-year yields got a fresh lift to new 2-year peaks above 2.40% as Wall Street banks continued the recent trend of outcompeting each other with ever higher calls for US rate rises. Citigroup upped the ante further today with a call for 4 50 bps rate hikes by the end of this year, helping to push the US 5 year yield above 2.5%, and further above the US 10 year yield, inverting the 5/10 spread even further.   

We’ve seen some decent gains today in the cannabis space with Sundial Growers and Tilray surging after a House panel said it would vote next week for the second time to decriminalise marijuana. The Senate is also set to pass a bipartisan bill to expand scientific and medical research on marijuana and its compounds. Aurora and Canopy Growth are also higher.  

Jessica Alba’s Honest Company’s share price looks set to fall back towards new record lows, and further away from its IPO price after its latest Q4 results missed expectations, and offered a disappointing outlook.

FX

The Japanese yen has been absolutely battered this week, hitting a six year low against the US dollar and is likely to fall further towards 125.00, prompting questions about possible Bank of Japan intervention to slow its decline. It is likely that we will see further weakness in the short term, and while the Bank of Japan won’t be able to prevent this, they will be concerned at the speed that it is happening. In that context we can probably expect to hear some chatter about yen weakness in the next few days and the potential for the central bank to introduce some two-way risk into a market that has seen the Japanese yen on course to post its worst monthly decline since November 2016. 

The pound has shrugged off a disappointing UK retail sales number for February, which saw a decline of -0.3%. On the plus side we saw non-food sales post a decent gain with clothing sales rising 13.2%, while fuel sales also rose as the relaxing of Plan B restrictions saw an uplift to travel. Online sales fell back as did food store sales as more people went out to bars and restaurants. On an annualised basis sales rose by 7%.

Commodities

We’ve seen another big range for Brent crude oil prices this week briefly pushing back above $120 a barrel early on, before slipping back. The outlook for demand continues to remain uncertain as rising prices fuel speculation about demand destruction against a backdrop of a reluctance on the part of EU leaders to countenance a Russian import ban, and this has seen prices slide back as we come to the end of another choppy week. Nonetheless oil prices still look to finish the week higher, calling a halt on two weeks of declines.

After a big fall last week gold prices have recovered some of their mojo this week, although we still remain well below the highs of this month. The continued rise in US yields hasn’t prevented gold rebounding this week, however it could dim the appeal of a retest of this month’s peaks.

Natural gas prices have also slipped back after the EU and US signed a deal to provide at least 15bn BCM of LNG to Europe this year, as a small first step to reducing the reliance of the region to Russian gas.

Volatility

Starting with equities, price action for Adobe remains elevated in the wake of the downbeat outlook it published earlier in the week. Shares continue to recover some of the losses, but daily vol on Thursday sat at 193% against 100% on the month. The UK’s Rank Group also found itself in focus yesterday with a spike in early trade seeming to elevate interest, lifting daily vol to 344% against 196% on the month.

Among equity indices however it’s a story of subdued markets, with all the majors posting daily vol below that of the monthly equivalent, although the CMC proprietary Cannabis share basket continues to sit as an outlier, with daily vol of 182% against 126% on the month. The sector was said to have been lit up by a debate amongst lawmakers in the US which would legalise marijuana at a federal level.

Robusta Coffee is on the radar in terms of commodities with conflicting pressures of growing concern over how the global economy will be impacted by Russia’s assault on Ukraine being offset by concerns of low rainfall hitting harvests out of Brazil this year. Daily vol advanced to 38.27%, although that was barely above the 37.67% on the month, underlining the generally subdued state of the market.

Rounding out with fiat currencies, the dollar-yen is in focus with the pair continuing its advance out to fresh highs yesterday. There has since been a marked reversion and with the yen’s safe-haven status we may well see more of this, but this remains a highly active trade with daily vol of 7.74% against 6.52% on the month.

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