European markets have undergone another difficult session and look set to close lower for the second session in a row, after the latest UK budget painted a bleak outlook for the UK economy over the next two years, and the US dollar jumped on hawkish comments from St. Louis Fed President James Bullard.
Europe
We’ve seen some significant moves because of today’s UK budget, which painted a bleak outlook for the economy over the next two years, and a 7% drop in disposable incomes for UK consumers.
The best performing shares have, somewhat counterintuitively, been SSE and Centrica, despite the announcement of a 45% levy on the “excess profits” of low-carbon energy generators from January 1st. The levy would be applied to profits accrued above the £75/MWH level.
The shares initially dipped lower before recovering after it was announced that the energy price cap would rise to £3k from next April, up from the current £2.5k.
There was no windfall tax on the banking sector which is a welcome relief for the likes of Lloyds and NatWest Group, with the sector also benefiting from a reduction in the banking surcharge from 8% to 3%.
House builders also breathed a sigh of relief as the stamp duty cut was kept in place until March 31st 2025.
Royal Mail, or International Distribution Services as it is now known has reported a 3.9% decline in H1 revenues to £5.84bn, as well as announcing a loss before tax of £127m, a sharp drop from £315m profit a year ago.
The Royal Mail part of the business saw a 10.5% fall in revenues as well as contributing to the underperformance of the entire business, with losses coming in at £219m, a huge contrast to the £235m profits this time last year, as the costs of the current industrial action continue to weigh on the business.
While its GLS business saw a 9.5% increase in revenues, profits fell to £162m from £169m.
On the outlook management said that full year operating losses are expected to remain between £350m and £450m which includes the recent and current strike day losses.
Burberry shares have seen a decent move higher over the past couple of weeks in anticipation that, after a poor Q1, due to Chinese lockdowns, the performance in Q2 is expected to be much better.
Today’s H1 numbers have borne that out with comparable store sales for Q2 improving to 11% from 1% in Q1, pushing H1 sales up by 5%.
Asia Pacific was the underperformer declining 4% in H1, with mainland China sales declining 19% during the first half. The Americas was also a poor performer seeing a decline in same store sales of 3%. Europe, Middle East, and India came to the rescue with H1 sales of 34%. Adjusted operating margins improved by 150bps to 17.7%. Pre-tax profits increased to £251m from £191m a year ago.
US
US markets have opened sharply lower after St. Louis Fed President James Bullard said that the central bank needed to go much further in raising rates, saying that to really get handle on inflation the terminal rate had to rise to between 5% and 7%. This is much higher than the current target level for markets of 3.75% to 4%.
Unsurprisingly the Nasdaq 100 has led the losses while yields have also shot higher, with the US 2 year and 10-year yield both reversing from 6 week lows.
NVidia shares have seen a good run of late, even though they are still down over 45% year to date, with last night’s Q3 numbers seeing the shares slip back a touch on the open. In August Nvidia slashed its revenue outlook to $6.7bn while saying it expected gross margins to fall to 43.7% from 65.1%. The downgrade was attributed to a big drop in gaming revenue which fell 44% from Q1, to just over $2bn. Its Q2 numbers confirmed that downgrade to guidance, with profits coming in at $0.52c a share and revenues coming in line at $6.7bn. They also lowered guidance for Q3 to $5.9bn, a number that they managed to slightly beat yesterday at $5.93bn, helped by outperformance on increased demand for its data centre chips, which offset slowing demand for gaming chips. Profits came in at $680m, slightly below expectations, with the company offering Q4 revenue guidance of $6bn, +/- 2%.
Cisco Systems shares have also been on a decent run since the October lows, with yesterday’s Q1 numbers prompting the company to upgrade its full year guidance. At the beginning of the quarter Cisco said it expected Q1 revenue growth of between 2% and 4%, and profits of $0.83c a share. Last night the company reported profits of $0.86c a share on revenues of $13.6bn. or Q2 profits are expected to come in at a similar level, while upgrading full year profits to between $3.51c to $3.58c and full year revenue growth of between 4.5% and 6.5%.
We have another big US retailer reporting after the bell, Williams-Sonoma which has seen a modest rebound from its October lows. In its last set of numbers in Q2 there was little sign of a slowdown in consumer spending with the owner of Pottery Barn reported record revenues of $2.14bn, a rise of 11.3%, although gross margins came down from 44.1% a year ago to 43.5%.The retailer reiterated its full year guidance of mid to high single digital annual net revenue growth, with the goal of increasing annual revenues to $10bn by 2024.
FX
The euro has started to lose a bit of traction after several policymakers pushed back on the prospect of a 75bps rate hike in December, and that any move was likely to be in the region of 50bps. The final revision of EU CPI also came in slightly lower at 10.6%, while the US dollar has gained ground after hawkish comments from St. Louis Fed president James Bullard.
The pound has come under pressure and gilts have sold off, sending yields higher after the Chancellor of the Exchequer outlined a budget that was long on tax hikes and short on spending cuts, although today’s moves have also got caught up today’s rebound in the US dollar and yields in the US.
The OBR outlined a very difficult couple of years, predicting that living standards could fall by as much as 7% over the next two years and house prices could fall by 9%. That comes across as optimistic, particularly on house prices, at a time when inflation isn’t expected to fall below 7% until 2024, and tax thresholds are being kept at the same levels until 2028.
Sterling isn’t being helped by a rebound in the US dollar, which is also exerting downward pressure on it, but the fact that it’s also lower against the euro suggests that the weakness is not just US dollar driven.
Commodities
A rebound in the US dollar, along with concerns over future demand has seen crude oil prices continue to drift lower sending Brent prices to their lowest levels in 4 weeks.
A sharp rise in yields and a rebound in the US dollar has seen gold prices fall sharply after St. Louis Fed President James Bullard said that the terminal rate for Fed funds would need to go to between 5% to 7% in order to bear down inflation. This is way beyond most market expectations, and is probably a minority view at this point, but it nonetheless speaks to how sensitive markets are to the prospect of higher rates.
Volatility
Vodafone stock was in for something of a rough ride on Wednesday after the market continued to digest disappointing earnings news from earlier in the week. Shares traded in a range of around 2.5%, driving daily volatility in the heavyweight to 87.4%, more than double its one month print of 42.29%.
Earnings news also drove heightened levels of price action for Home Depot. With a market cap more than $300 billion, it’s unusual to see companies like this standing out, but one day vol sat at 91.12% against 55.84% on the month.
Volatility in cryptos was sharply reduced with one day readings all sitting below the one-month equivalents across the asset class, but the situation was somewhat different with fiat currencies. The Euro saw heightened levels of price action, with the short-lived rally against the greenback seeming to run out of steam. One day vol on EUR/USD sat at 16.96% compared with 13.34% on the month.
And in commodities, crude oil has been in focus, once again testing that support level around the $92.75 level. Easing geopolitical tensions and demand concerns from China appear to be taking a toll here, although clearly OPEC has the potential to reign in production. One day vol on Brent Crude sat at 43.06% against 36.98% on the month.
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