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European markets struggle for gains as Russia ups the ante

gas refinery

European markets initially got off to a positive start today, helped by the spill over from yesterday’s reports that Nord Stream 1 would restart on time, however these gains have been tempered over doubts as to whether gas flows would return to similar levels as before.

Europe

Comments from EU Commission President Ursula Von der Leyen that that the EU needs to start rationing now for a winter without Russian gas appears to have upped the ante further, with Putin likely to try and make it much more difficult to build up storage capacity to that end.

More aggressive comments from Russian foreign minister Lavrov have also prompted further uncertainty after he said Russia’s objectives in Ukraine would extend to other territories in Ukraine if NATO delivers long range weapons to Kyiv. This apparent escalation raises the prospect of an even longer and more protracted conflict with all the inherent uncertainty that is likely to bring.

Against this less investor friendly backdrop, European markets have slipped back as we look ahead to tomorrow’s eagerly anticipated ECB rate decision, where the choices facing ECB president Christine Lagarde appear limited.

Just Eat Takeaway shares have enjoyed a decent day after Citigroup suggested that in the medium term the company could be one of the first of the food delivery companies to become cash-flow positive. 

Ocado shares are also higher ahead of tomorrow’s H1 update, where investors will be looking to see how much increased costs have impacted EBITDA We already know that sales have fallen in its retail operation, by 5.7% in Q1 and 8% in Q2. How much bad news is already priced in?

Royal Mail shares have come under pressure after management said the business was losing £1m a day, and that changes would have to be made in order to turn the business around. The shares are down over 40% year to date and are just above 18-month lows, while staff have just voted to go on strike.

Unless management and the unions can come to an agreement on changes to working practices as well as pay the outlook looks bleak. Without changes Royal Mail looks set to fall further behind its nimbler peers, which in turn could lead to more job losses down the line. The mantra of adapt or die has never been more apt, and it’s a lesson both sides will need to comprehend. 

After two days of declines, Haleon’s share price could be starting to find its feet after Goldman and UBS started coverage with a “buy” recommendation.  

US

The deterioration in sentiment in today’s European session has translated into a weaker open for US markets today, with another drop in existing home sales in June, falling -5.4% the fifth successive monthly decline.

Amongst the companies in the news oilfield services provider Baker Hughes is lower after revenues and profits miss expectations. Q2 revenues came in at just over $5bn while net losses widened to $839m. 

Netflix shares opened slightly higher after reporting a mixed set of Q2 numbers. A loss of 970k subscribers was much less than feared, with the new series of Stranger Things helping to mitigate losses there. Against such a low bar, and with the shares back at 2017 levels there is perhaps a recognition that the business is in much better shape relative to its valuation of 5 years ago.

Revenues rose by 9% to $7.97bn, while guidance for Q3 was set at $7.84bn, which would be a 4.7% increase on the same quarter a year ago. Profits forecasts also came in lower at $2.14c, below estimates of $2.72c a share.

This is disappointing but also not altogether surprising given the strength of the US dollar which is costing Netflix dear. With Netflix producing films and TV in more than 50 countries, and three out of its six most popular TV seasons using non-English language titles, it seems odd that the company doesn’t have some mechanism to mitigate this FX exposure.

Of its peers Disney and Paramount Global have also edged higher, as attention turns to the subscriber numbers of these two as they come up on the rails behind Netflix.

After the bell, Tesla is expected to report on the impact the various China shutdowns have had on its business in Q2, as it looks to meet an annual delivery target of 1.3m vehicles.

FX

The pound has been little moved after inflation hit a new record high of 9.4% in June, although core prices slipped back to 5.8%. Slightly more worryingly there was little sign of slowdown in PPI as prices here continued to rise sharply. Input prices surged to a new record of 24%, up from 22.4%, while output prices rose to 16.5% from 15.8%, both of which are likely to bleed into headline CPI in the months ahead.

At the last meeting, the Bank of England stated that they would act “forcefully” on inflation, if necessary, while yesterday Governor Andrew Bailey said that a 50bps rate rise was being considered for August, but was not locked in. When looking at today’s inflation numbers one must question as to why not? Inflation appears to be becoming embedded in the UK economy and while criticism by politicians of the central bank’s actions could be construed as controversial, it’s also not altogether surprising. Bailey talks about the importance of the central bank’s independence, but it also needs to be set in the context of its competence, and let’s just say the communication since last November could have been better. 

The messaging and guidance over the last 12 months, has been muddled and confusing, lacking in discipline, and while there’s little the MPC can do about surging fuel prices, the longer inflation stays high, the harder it will be to squeeze out of the system. 

Commodities

After three days of gains crude oil prices have slipped back ahead of the latest inventory data which showed a decline of 445k barrels in the last week.

The direction of travel for oil prices is still uncertain against an outlook of slowing demand, as rising inflation prompts central banks to raise rates in an attempt to suppress inflation expectations. That said a big build in gasoline suggests that high prices are starting to raise concerns over demand destruction at the consumer level.

Volatility

BASF found itself in focus again yesterday as the shares took another step higher, taking gains since the middle of last week to in excess of 10%. The stock has however come off heavily since the start of the year given the company’s reliance on natural gas for many production processes and nothing has fundamentally changed here. Daily vol printed 148% up from 64% on the month.

Crypto price action remains sharply elevated, again with Ethereum Classic topping the list. The token briefly tested highs not seen since May but slipped back with some technical resistance being seen around current levels, but daily vol printed 216% against 97% on the month.

In fiat currencies, the Hungarian Forint was once again the standout, but this time in the wake of the currency making some gains over the US Dollar. The pair fell around 2.5% off the back of hopes that the government’s plans to tackle a budget deficit and talks with the EU over payment of recovery funds would yield a positive outcome. There’s concern that gains here however could be short lived if energy prices remain so high, but daily vol sat at 27.11% against 20.32% on the month.

Finally, cannabis stocks were again looking active with suggestions that a degree of short covering may have been in play at the start of the week. This is driven by the idea that talk of legalisation may again resurface in Washington. That drove interest in CMC’s proprietary basket of cannabis growers, elevating daily vol to 125% against 106% for the month.


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