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European stocks struggle as recession fears grow

a sea of red for prices

European markets initially opened higher today but have struggled to generate much in the way of upward momentum against a backdrop of concerns about a weaker economic outlook, and central banks which look set to embark on a series of aggressive moves to hike rates to contain upward pressure on inflation.

Europe

The FTSE100 is being helped by the resilience in the energy sector, with BP and Shell leading the way, along with Harbour Energy which may have started to find a base after being clobbered on the back of the windfall tax announcement.

HSBC and Standard Chartered are also higher after a decent session from their Hong Kong listed shares, after a report from KPMG which said that Hong Kong banks are likely to see their revenues rise in 2022, due to improved interest margins. This is particularly good news for HSBC which has very thin margins.

ITV shares are doing well after paying £103.5m for a 79.5% majority interest in Plimsoll Productions, a producer of natural history productions, as it looks to increase and broaden the scope of its content business.  

Despite a decent set of Q4 numbers and record annual revenues, the market reaction to today’s Q4 and full year numbers from Ashtead has been pretty disappointing. In Q4 the business increased its total revenues by 19% to $2.08bn. Rental revenue also saw good levels of growth with a 24% rise to $1.87bn, while profits before tax rose 26% to $386m.

On a full year basis revenues rose to a record $7.96bn, and profits before tax increased 35% to $1.67bn. The dividend was also increased to 67.5c from 48.2c, with the company saying that the new financial year has started well, with rental revenue expected to rise between 12% to 14%. This is lower than last year and could be why the shares have drifted lower today.  

On the downside its consumer discretionary once again feeling the most pressure on the back of stagflationary concerns and the prospect of weaker consumer spending, with Ocado and Kingfisher the worst of a sorry bunch.

US

After three days of big losses, we’ve seen US markets open higher as the two-day Federal Reserve meeting gets under way later today, although gains have proved difficult to sustain.

We’re also seeing pullback in yields after outsized gains over the past few days, which is helping provide a bit of a lift to equities.

The latest US PPI numbers for May showed that inflation pressure in the US appears to be starting to slow with core prices slipping more than expected to 8.3%, down from 8.6% in April, and well down from the March peaks of 9.6%. Headline inflation also slipped back to 10.8%, also more than expected. This is important in the context of the wider debate over Friday’s outsized CPI print, which on the face of could be an outlier. PPI tends to be a leading indicator and CPI isn’t PCE, the Fed’s preferred measure, which raises the possibility that the market may be getting ahead of itself with respect to a 75bps hike tomorrow.

On the earnings front Oracle shares have jumped higher today after reporting better than expected Q4 revenues of $11.8bn, helped by broad gains across all of its cloud businesses.

FedEx shares have jumped today ahead of next week’s Q4 revenue numbers after the company announced it was raising the dividend to $1.15c a share, while undertaking a board shakeup at the same time.

Coinbase shares have slipped back despite announcing an 18% cut in its workforce, or 1,100 positions as it looks to cut costs in the midst of the current crypto meltdown. MicroStrategy shares are also under pressure over concerns about a possible margin call if bitcoin falls below the $20k level.

FX

The US dollar has seen a modest pullback after hitting its highest levels in 20 years yesterday, ahead of the conclusion of this month’s FOMC rate decision, where there is a rising expectation the Federal Reserve would tear up its guidance of the last few months and hike by 75bps, instead of the expected 50bps.

Last Friday’s unexpected jump in headline CPI has seen markets perform a sharp pivot on the outcome of tomorrow’s meeting. It still feels like markets are putting the cart before the horse here, and there are risks to the Fed reacting to what is so far a single data point.

To begin with the Fed doesn’t target CPI when it measures inflation, it measures PCE, and price pressures here have been more subdued and less volatile. Furthermore, the Fed can shift when it comes to guidance for July and September by putting the prospect of 75bps on the table for both these meetings, rather than switching horses from 50 to 75bps tomorrow.

How the Fed communicates with markets is equally as important when it comes to its intentions. A bigger move tomorrow puts that at risk, and Fed officials will know that. The sensible move would be to hike as expected and deliver hawkish guidance for July and September.

The pound has been further clobbered today after unemployment ticked up to 3.8% in April, while wages excluding bonuses remained unchanged at 4.2%. Including bonuses, wage growth slowed from 7% to 6.8% exacerbating the squeeze on real earnings.

The weaker than expected rise in wages growth may well reassure the Bank of England when it comes to a wage price spiral, however that doesn’t mean pressure on real wages will ease, as the central bank gets set to deliver another token rate hike this week.

Sadly, for the central bank its weakness on inflation is making the picture on domestic inflation even worse, with the pound slipping to its lowest levels since March 2020, back to the 1.2000 level, and down over 15% against the US dollar over the last 12 months, despite raising rates 4 times this year.  

Commodities

Downside risk in oil prices continues to be mitigated by supply concerns, in spite of the problems being seen in China with the reimposition of new restrictions. Problems with output in Libya have helped to put a floor under prices despite rising worries about a global recession. Prices have also been supported by OPEC who maintained their outlook that oil demand will exceed pre-pandemic levels this year, despite the risks of a slowdown in China.

Gold prices have struggled to rebound from a three-week low, with only a modest fall in yields preventing further declines, Prices are struggling to gain much traction, with the next key support at $1,800 an ounce. 

Volatility

Shares in UK transport operator Go-Ahead surged at the start of the week as the market responded to the idea that a bidding war could be underway for the business – and management had signalled they were already happy with the prices being offered to take the company private. The underlying share price advanced around 20% on the day, driving daily vol to 573% against a one month reading of 205%. Critically there’s the chance that unless one suitor walks away, further price action could follow.

Crypto volatility has been reignited since the weekend following those concerns of insolvency risk on the Celsius lending platform, which yesterday announced a pause on withdrawals. That’s driven activity across the asset class which has been looking becalmed for the last month, with Chainlink daily vol – already an active play – jumping to 430% against 151% on the month, whilst Ethereum Classic printed 319% on the day versus 117% for the month.

A noticeable gap lower after the weekend break kept interest high on Italy’s benchmark index of equities, with those concerns regarding ECB rate hikes still taking a toll on the underlying market. Daily vol here posted 57% on Monday, significantly higher than the 31% seen on Friday. Monthly vol now sits at 25%.

A noticeable gap lower after the weekend break kept interest high on Italy’s benchmark index of equities, with those concerns regarding ECB rate hikes still taking a toll on the underlying market. Daily vol here posted 57% on Monday, significantly higher than the 31% seen on Friday. Monthly vol now sits at 25%.

 


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