It’s been another weak session for markets in Europe despite a softening in yields, with the FTSE 100 slipping to a one-week low, weighed down by weakness in basic resources and financials.
Europe
Despite the drag from the two aforementioned sectors, we have managed to rally quite strongly from these intraday lows, with lower yields prompting a modest rebound in housebuilders and consumer staples. Asia markets also fell sharply after the RBNZ hiked rates by another 50bps, while also indicating that there were more rate hikes on the way.
Mining stocks have come under pressure from lower metals prices as well as disappointment over that latest numbers from Australian mining giant Rio Tinto whose shares have slipped back after reporting a 13% drop in full year revenues from $63.5bn last year to $55.55bn. This was primarily down to a sharp drop in metals prices from the peaks seen in 2021, which was never likely to be repeated, as profits fell to $12.42bn a 41% decline from last year’s $21.1bn. Weak Chinese demand due to Covid lockdowns hasn’t helped either, with the mining company cutting its dividend to 492c a share, down from last year’s 1,040c which also included a 247c special dividend payment.
Burberry shares have also slipped back from yesterday’s record highs, after some lukewarm reaction to the new fashion line from creative designer Daniel Lee, prompted some profit taking.
Lloyds Banking Group shares also came under pressure in early trading, and were down by over 2% at one point, despite the bank posting a decent set of full year numbers and have managed to claw these losses back. The early share price weakness had all the hallmarks of an over-reaction, given that the bank was able to match last year’s statutory pre-tax profit of £6.9bn, despite £1.51bn in impairments, and is still very profitable. The dividend was also increased along with a £2bn share buyback.
If there was a weakness it was in costs, which are rising, coming in at £9.1bn in 2022, and are set to rise over the next two years, but overall, there was little in the numbers to justify the early share price weakness given how much the shares have underperformed relative to its peers over the past two years.
US
US markets have opened modestly higher, after St. Louis Fed President James Bullard said that he envisaged a Fed funds projection of 5.37%, broadly in line with the Minneapolis Fed’s Neel Kashkari who has consistently indicated a pause at 5.4%. With markets pricing a slightly more aggressive stance than this, yields have slipped back a touch. Back in January Intel shares dropped sharply after the chipmaker issued an ugly forecast for Q1, as well as saying it expected to post a loss in the current quarter. The shares have fallen further today after management announced they were cutting the dividend.
Q4 revenues came in at $14.04bn, sharply below expectations of $14.5bn, however it was the Q1 guidance that prompted the sharpest intake of breath. Intel said it expects to post a loss of $0.15c a share along with a sharp fall in revenues to between $10.5bn and $11.5bn, well below expectations of $13.96bn. Gross margins were also expected to fall to 39%, from an expected 45.5%. Today the chipmaker announced it was cutting the quarterly dividend to $0.125c a share from $0.365c a share, although it kept its revenue, loss, and gross margin forecasts unchanged. This should help the company save about $4bn. Intel also said it was temporarily reducing compensation programs for management and employees in a further attempt to preserve cash.
Nvidia shares are also in focus as we look towards its Q4 numbers. When the company reported in Q3 the company offered Q4 revenue guidance of $6bn, +/- 2%. Since the start of this year Microsoft indicated that demand for gaming had remained lower, which is likely to be reflected in Nvidia’s revenue on the gaming side. Demand for higher specification AI chips could well offer some hope here with Nvidia a key supplier in this area. Profits are expected to come in at $0.81c a share.
Coinbase shares are also in focus after reporting a smaller than expected loss of $557m for Q4, while revenues came in at $629m, a 75% decline from a year ago For Q1 Coinbase said it expects to see Q1 subscription and services revenue of between $300m and $325m.
FX
It’s been a subdued day for FX markets ahead of the release of the latest Fed minutes later today, with US dollar giving up some of the ground it gained yesterday with the Japanese yen being a notable beneficiary.
The New Zealand dollar has also moved higher after the RBNZ raised rates by 50bps with the promise of more to come.
There’s been little reaction from the pound after a number of US banks upgraded their growth forecasts for the UK economy, while Citi said it expects inflation in the UK to fall back to 2% by the autumn. This seems extraordinarily optimistic given that it is still well above 10% now and how sticky UK CPI has tended to be over the last 30 years.
Commodities
Crude oil prices look set to fall for the second day in a row over concerns that sharply higher rates could prompt a slowdown in demand. Despite the recent weakness, prices are still in the uptrend they’ve been in since the lows back in December, with the China demand story keeping a floor under any dips.
Gold prices appear to be treading water just above the recent lows at $1,820, with the modest fall back in yields helping to keep prices above their recent lows.
Volatility
Once again, earnings news served to drive price action amongst a number of blue-chip stocks during Tuesday’s trade. Better than expected numbers from the banking heavyweight HSBC drove interest in the stock with one day vol on the London listing coming in at 65.79% against 27.43% for the month.
Across the Atlantic, Home Depot missed its forecasts for the first time since 2019 after sales fell short and rising costs took a toll on the business. The underlying settled down some 7% last night, with one day vol of 67.85% against 40.6% for the month.
Better than expected PMI data from the UK yesterday raised hopes that the country may be able to avoid a recession although came with the caveat that the Bank of England would likely push through yet more rate hikes as a result. That gave Sterling a lift, with cable retaking the 1.21 level for the first time in a week. One day vol on the pair sat at 13.56% against 10.72% on the month.
And the heavy weighting of HSBC in CMC’s proprietary basket of UK banking stocks drove price action in this cohort during Tuesday’s session, too. With only seven constituents, this basket has the ability to deliver outsized movement and traded in a range of 2.5%. One day vol printed 31.25% against 24.18% for the month.
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