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FTSE 100 outperforms as sterling slumps on Bailey's cost of living word salad

An array of £50 notes

After a positive read across from Asia markets on the back of positive Chinese PMI numbers,  European markets initially carried on the positive read across, rallying strongly with basic resources and industrials enjoying some solid gains, which is helping the FTSE 100 outperform.

Europe

As the day has progressed trading has been somewhat more mixed, with the DAX falling back from its intraday highs, with the euro pushing higher while the pound has been clobbered after some perceived dovish comments from Bank of England governor Andrew Bailey. 

Rio Tinto, Antofagasta, and Glencore are all showing solid gains on the back of rising copper and other metals prices.   

Weir Group is the best performer after a strong set of full-year numbers as well as positive guidance. Full-year revenue of £2.47bn was a 21% increase, while statutory profits before tax rose 24% to £260m, while cash flow conversion improved to 87%. For 2023 the company guided for an operating margin of 17%, up from 16%, and a cash flow conversion of between 80% and 90%. 

The market reaction to Reckitt Benckiser’s Q4 and full-year results was a pretty lacklustre affair. Although Q4 results beat expectations on like-for-like sales, which rose 6.2% with solid gains across all the businesses, and net revenues also came in ahead of forecasts at £3.83bn, the outlook was slightly disappointing.  The company pointed to record demand for spares and equipment. 2023 margins are expected to be in line with current levels or slightly above 23.8%, and like-for-like revenue growth of mid to single digits.

Aston Martin Lagonda shares have risen to 7-month highs after reporting a 26% rise in full-year revenues to £1.38bn, after a solid Q4 performance which saw a 46% rise in revenues to £524.3m. The luxury car company also posted a Q4 profit before tax of £16.3m, as it shifted 2,352 units, even as annual losses widened to £495m.  On the guidance front, Aston Martin said that they expect to shift 7,000 cars, a sizeable increase from this year’s 6,412. The company also said that it hopes to improve its EBITDA margins to 20%.

On the downside the Persimmon share price has been crushed despite posting full-year results that saw underlying profits before tax rise to just over £1bn. The housebuilder also managed to increase average selling prices to £248,616, while increasing completions to 14,868. Attributable pre-tax profits did show a fall but that was mainly due to a £275m charge in respect of building safety remediation work, undertaken to pay for cladding removal and life-critical fire safety remediation.

Concern over the outlook is driving today’s move lower after Persimmon declined to offer firm guidance on sales rates, saying it was too early given the uncertain economic outlook, with the house builder citing higher borrowing costs and availability of mortgages are also affecting sales rates. On forward sales, they currently stand at £1.52bn, down from £2.21bn a year ago, while weekly sales rates, which fell to 0.3 in Q4, had started to improve in the opening weeks of the new fiscal year to 0.52. Cost inflation was also flagged, currently running at 8% and in the absence of similar increases in selling prices, could impact margins by 800bps.

The latest Nationwide House price survey also showed that prices fell 1.1% year over year in February, which was the biggest decline in over 10 years.

US

US markets opened slightly lower as rising yields across the curve contrived to keep a bit of a lid on any gains, after ISM manufacturing prices paid jumped sharply in February, although there have been some bright spots, like Caterpillar which is doing well on the back of the improvement in this morning’s China PMI numbers.

Goldman Sachs shares are in focus after a big fall yesterday after CEO David Solomon set out his plan to reinvigorate the share price. At yesterday’s Investor Day questions about its consumer banking unit dominated discussions due its losses of $4bn, and the admission it wouldn’t break even until 2025. 

AMC Entertainment shares have also come under pressure after reporting Q4 revenues of $990.9m, which was down from the $1.17bn seen in the same quarter last year. The net loss increased to $287.7m or $0.26c a share. Full-year revenues did see an increase, rising to $3.9bn however there is little evidence that the cinema chain is in any position to return to a position of positive cash flow quite yet. Management may cite the fact that they have been able to bolster their cash and equity position but cash burn in Q4 was still $57.5m, and with Q4 revenues coming in below the previous quarter the cinema sector remains very much on life support. CEO Adam Arons insisted that AMC remains on the right track and continues to innovate and that the business won’t return to pre-pandemic norms until 2024 or 2025 at the earliest when the company was returning annual revenues of $5.4bn. The ability to innovate is certainly essential, however, if your idea of innovation is launching AMC Perfectly Popcorn in Walmart stores, you’re going to need to sell a hell of a lot of it to come anywhere close to reducing the debt and getting back to a cashflow positive state.

Rivian shares have slumped after missing on Q4 revenues which came in at $663m, as the electric car company slumped to a full-year loss of $6.7bn. Total production in Q4 came in at 10,020, delivering 8,054 of them, meeting its 25k annual target for full-year production. For 2023 guidance Rivian said it expects to double this output to 50k, which was below what many had been expecting while narrowing its losses to $4.3bn. The company says it expects to spend $2bn on future capex, at Normal and at its Georgia facility, but that gross margins are likely to remain negative.

On the EV theme Li Autos and XPeng shares are higher after February deliveries in China showed a big improvement on the January numbers as the Chinese economy continued its reopening process.

FX

The US dollar has been mixed, pushing higher against the pound and lower against the euro, while US 2-year yields hit their highest levels since 2007, and the US 10 year popping up to 4% for the first time since November.

The euro has moved higher on expectations of further increases in interest rates. This is despite the latest German PMI numbers showing further weakness in manufacturing activity in February, with new orders continuing to fall, and further reinforcing the expectation that the German economy is in recession. Despite this Bundesbank President Joachim Nagel was insistent that rates needed to rise further and the quicker the better, with further hikes needed beyond March in comments made earlier today. With German inflation unexpectedly rising to 9.3% in February, driven by higher food prices and following in the footsteps of upside surprises in Spain and France earlier this week, these calls for higher rates are only set to get louder, from certain officials.   

Contrast Nagel’s comments with Bank of England governor Andrew Bailey’s woolly comments to the Cost-of-Living Crisis Conference, in which he employed a word salad of mixed messaging about the outlook for monetary policy, thus keeping the pound on the back foot today, and amongst the worst performers, falling against both the US dollar and the euro as markets interpreted his messaging as dovish in nature, prompting gilt yields to fall sharply.

Today’s UK economic data was a mixed bag, with declines in house prices coming against an improvement in manufacturing PMI, and a pickup in consumer credit in January.

Bailey said that nothing had been decided when it came to further hikes in rates, although he also said that more rate rises would likely be needed and that the lessons of the 1970s ought not to be forgotten. His comments that the economy was evolving in line with expectations were particularly laughable given that a few months ago the central bank was saying that the UK economy was already in recession.

Recent data now suggests that the UK economy is not in recession. Nonetheless, the weakness in the pound shouldn’t be too surprising given that we know for certain that more rate hikes are coming from the ECB, as well as the Federal Reserve in March, and probably May as well, while in the UK we’ll probably see another hike in March, while the picture after that is less clear given today’s interpretation of Bailey’s comments.

This poses dangers for the Bank of England in that equivocating about the need for further rate hikes weakens the pound and underpins the sticky nature of headline inflation, as well as core inflation. Someone should remind the Bank of England governor that we are still north of 10% on headline CPI, much higher than Germany, and a 4% base rate is unlikely to come anywhere near close to addressing that. Inflation remains a clear and present danger to anyone with a pair of eyes and a shopping list and is continuing to rise.

Commodities

Ordinarily, a decent set of Chinese economic numbers would have crude oil prices pushing higher, and with manufacturing activity hitting its highest levels since 2012 we did see crude oil prices push higher initially, but they have since slipped back. However, while the jump in economic activity was welcome there are a number of questions as to whether it can be sustained. A strong rebound was always likely given the economy has been in hibernation for such a long time, with the big question being whether it is sustainable, and on that, the jury is out with inventories currently at high levels, which helps explain why we’ve since slipped back.

Volatility

A gloomy outlook from Bayer saw shares in the biotech and pharmaceuticals company trade as much as 5% lower during Tuesday’s session, before recovering some of those losses heading into the close. That was sufficient to drive one-day volatility in the stock to 74.78% against 43.15% for the month.

Sugar prices ended the month on a turbulent note, rallying off five-week lows on Monday before handing back most of the upside during yesterday’s trade. A weaker run for the Brazilian Real was seen as liquidating futures positions, resulting in the sell-off. One day vol on the raw sugar cash contract came in at 39.62% against 34.64% for the month.

It was the somewhat esoteric Euro-Canadian Dollar trade that stood out in terms of fiat currencies yesterday with the cross advancing. Inflation data from the eurozone came in a little hotter than expected whilst Canadian GDP readings fell short. As a result, one-day vol printed 6.99% against 6.72% on the month – the price action may have been comparatively limited but it was the highest we saw within the asset class on Tuesday.

And European banks had a good end to February, too. Yesterday’s announcement regarding profitability targets from Santander was well received by the market and saw the sector boosted by read-across. One day volatility on CMC’s proprietary basket of European banking stocks advanced as much as 3.6%, lifting one day volatility to 29.81% against 28.32% for the month.


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