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Sterling slides back after Truss U-turns, and Kwarteng departs

UK Prime Minister Liz Truss

European markets look set to end a turbulent week very much on the up, although we are slipping off the highs of the day, and while the DAX looks set to finish higher for the second week in a row, the FTSE100 has had a much more difficult week.

Europe

The task for the FTSE100 has been much harder, having hit a 20-month low yesterday, the UK index did look as if it might be able to reverse most of this week’s losses, however that prospect disappeared after the confirmation of the latest UK government U-turn, and the latest 1-year inflation expectations survey for the University of Michigan surged to 5.1% in October, serving to also pull US markets sharply lower.

This week’s volatility in UK bond markets has had a significant effect on the FTSE100 with wild swings in house builders, consumer staples and banks.

These moves have been driven by the sharp rise and fall in gilt yields, with the sharp moves lower in yields over the last 24 hours helping to pull these sectors off their lows, although today’s price action has been more subdued.

Weighing on the FTSE100 this afternoon has been weakness in energy and basic resources with concerns over recession acting as a drag on commodity prices.  

Ocado shares appear to be getting an uplift after it was announced that Kroger in the US, agreed to buy one of its rivals Albertsons. Ocado has a distribution deal with Kroger’s which generates a significant amount of income so the addition of Albertsons real estate could well add a lot of value to this proposition.

Royal Mail, which was renamed International Distribution Services earlier this month has seen its shares fall sharply after announcing the loss of up to 6,000 jobs, and the prospect of increased losses.

With the company losing over £1m a day and talks with the unions deadlocked, something had to give and with the disruption caused by strike action, job losses became almost inevitable.

The sad thing is that today’s job loss figure is higher than would have been the case if industrial relations were more cordial. With the company operating against much nimbler peers with a lower cost base the company is not only haemorrhaging cash but also losing market share. Further strike action will only make that situation worse and result in more job losses.

In H1 of this year the company reported an operating loss of £219m, against a profit of £235m a year ago, with the company saying that £70m of that was down to the 3 days of industrial action.  On the outlook IDS says it expects to see a full year adjusted operating loss of £350m, which may increase to £450m if customers move their business away in response to the prospect of further strike action. Because of the threat of further strike action, management have said they are unable to offer a clear outlook for the year.

The reaction of the CWU suggests that this dispute has some way to go, with the lack of trust between management and unions resulting in many more job losses. One thing is certain, no business can sustain these sorts of losses so let’s hope common sense prevails.  

US

US markets opened higher after US retail sales came in slightly below expectations at 0%, although the previous month was revised up to 0.4%. On the control group measure this came in better than expected rising to 0.4%, which appears to show that despite rising prices consumers still have the appetite to spend money.

These gains soon started to look vulnerable after the latest University of Michigan short term inflation survey saw a sharp surge in October, rising to 5.1% from 4.7% in October.   

It turns out vegan options are losing popularity if Beyond Meat’s latest numbers are any guide. The company has reduced its full year revenue forecasts to $400m to $425m from an upper target of $520m, while saying that Q3 revenue came in at $82m, well below the $115.6m expected. The company also announced it was cutting 20% of its global workforce.

JPMorgan Chase Q3 numbers have seen revenues come in at $33.49bn, beating expectations of $32.35bn, while profits came in at $3.12c a share, above the $2.91c a share.

Digging into the details, Q3 investment banking and FICC sales and trading beat expectations, coming in at $1.71bn and $4.47bn, while equities and sales trading revenue came in short at $2.3bn.

One notable item, and it was something that was expected, was a big increase in provisions of credit losses to $1.54bn. This was well above expectations and appears to indicate that JPMorgan expects to see trouble ahead.

JPMorgan also reported losses of $959m on sales of US treasuries with CEO Jamie Dimon saying that he expects to be able to resume stock buybacks early next year.  

Wells Fargo shares have shrugged off a $2bn regulatory charge in respect of a number of different legacy issues, which have been ongoing since new CEO Charlie Scharf took the reins to reform the bank.

On the underlying business, revenues came in better than expected at $19.51bn, above estimates of $18.8bn, while profits came in at $0.85c a share.

In line with JPMorgan Chase, provisions were higher than expected at $784m, as the deterioration in the economic environment prompted caution over the rising interest rate environment.

As a bellwether of the US domestic economy Wells Fargo is a useful weather vane of the US consumer. Non-interest income was down 25% largely due to lower mortgage banking income, and lower fees from across the rest of its businesses including wealth management and investment banking.

On the plus side consumer and small business saw a 29% rise in revenue because of higher rates and business balances

Citigroup’s Q3 numbers came across as a little bit of a mixed bag. Both revenues and profits beat expectations, revenues coming in at $18.5bn, while profits came in at $1.63c a share, however the shares fell back.

While profits were better than expected, there was some disappointment around FICC Sales and trading revenue which came in at $3.06bn slightly shy of expectations. Q3 investment banking revenue was also disappointing coming in at $631m, well below forecasts of $1.07bn.

The improvement in revenues appears to have come about through improvements in its consumer business, with increases in its branded and retail services business, which handles credit cards, as well as wealth management. Personal banking and wealth management revenue rose to $6.2bn, while branded credit cards saw a 10% rise in revenues to $2.3bn. Provisions came in at $1.4bn which was in line with expectations.

Citigroup has said it is continuing to shrink its Russia business.

Morgan Stanley shares are also on the back foot after Q3 revenues came up short of expectations. Net revenue fell 12% to $13bn, as revenues in investment banking as well as equity trading fell off sharply.

Investment banking revenue fell 55%, to $1.28bn, while equity trading revenues fell 14%. One bright spot was wealth management which came in at $6.12bn. 

FX

Gilt yields started today by continuing to fall back on expectations that UK PM Liz Truss would go full reverse ferret on the recent mini budget. This has now been confirmed along with the departure of Kwasi Kwarteng as Chancellor of the Exchequer, to be replaced by former health secretary, Jeremy Hunt.

When former Chancellor of the Exchequer Rishi Sunak took the decision to raise corporation tax to 25% from next year, he was widely criticised for raising taxes on business into the teeth of what was likely to be a significant economic slowdown, and urged to think again. His refusal to do so probably cost him the chance to win the Conservative leadership contest.

It is therefore supremely ironic that the decision to restore this policy today, only a few weeks after reversing it in the now infamous mini-budget, should be greeted in the manner that it has by markets, with sterling falling back, and gilt yields pulling off their lows of the day, and moving higher again.

This reaction suggests that recent events have been less about the policy itself, and more about those delivering it, as markets look to what is likely to happen next, as well as what next for the government’s budget, which is starting to look like a shell of its former self?

The pound is the worst performer today, having been the best performer yesterday, although it is still up on the week.

After selling off yesterday the US dollar has reasserted itself as the dominant currency today rising to a 32 year high against the Japanese yen, moving above 148.00, after the latest University of Michigan 1 year inflation expectations surged in September from 4.7% to 5.1%, against an expectation of a fall to 4.6%. This suggests that consumers are now starting to realise that inflation is now likely to be much higher for longer, and if that feeling is maintained then we could well start to see that in spending patterns in the months ahead, which would be bad news for the US economy.      

Commodities

Crude oil prices have continued to come under pressure as the rebound in the US dollar serves to reverse the gains we saw yesterday. With the IEA warning of a global recession yesterday in the face of rising prices, which now appear to be becoming embedded in the context of consumer inflation expectations.

Gold prices are also under pressure again slipping to their lows of the week as the US dollar reasserts itself, and yields edge higher.


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