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Stock markets recover from their lows, as US CPI hits a new 40-year peak

US market traders making prices

European markets have seen a negative bias for most of the day after getting a weak handoff from Asia after Chinese Premier Li Keqiang issued another warning of the effect that covid lockdowns would have on the Chinese economy, casting doubt on China’s ability to deliver on its 2022 GDP target of 5.5%.

Europe

We have recovered off the lows of the day, largely due to the more positive tone coming from Wall Street and the rebound in US markets.   

The European banking sector has seen a big slide on reports that a big European mutual fund, or funds, has cashed out of its stakes in Germany’s two biggest banks, Deutsche Bank and Commerzbank. Both stake sales happened at a significant discount to Monday’s closing price, with Deutsche Bank being the worst performer on the DAX today.

This appears to have spilled over into weakness in UK banks, although the weakness in HSBC and Standard Chartered may well be down to the growth warning issued by Chinese Premier Li about the Chinese economy, than any spillover effect from the weakness in Europe.

AstraZeneca shares are also under pressure on the back of profit taking after the shares hit record highs at the end of last week.

On the FTSE100, Rolls-Royce shares are the worst performers after being on the receiving end of a broker downgrade from JPMorgan on scepticism over the profitability prospects of its New Markets unit which includes the production of new modular nuclear reactors.

Online clothing retailer ASOS shares initially slipped to a two-year low, after reporting an H1 loss before tax of £15.8m, compared to a £106.4m profit a year ago. This was despite a rise in revenues to just over £2bn.

The decline in the shares proved to be fairly short-lived, bouncing back strongly, largely down to the fact that the rise in costs wasn’t entirely unexpected, and the shares are already down over 30% year to date and down over 68% year on year.

The losses in H1 appear to have come about due to a sharp drop in profit margins from 5.6% to -0.2%, which has been driven by elevated freight costs, as well as higher wages, not to mention the suspension of its business in Russia.

On the outlook, the retailer wasn’t much more optimistic, although full year guidance was kept unchanged, despite there being downside risks to the forecast     

easyJet has said it expects to see a H1 pre-tax loss of between £535m and £565m as the airline's load factor increased from 68% in January, rising to 81% in both February and March, as capacity was ramped up. In March the increase in capacity saw the number of flights increase to 80% of 2019 levels, pushing H1 total group revenue up to £1.5bn, with costs of just over £2bn.

In order to free up extra cash of £120m, easyJet sold and leased back another 10 A319s.

For the outlook, while losses are expected to come down, Q3 capacity is expected to rise to 90% of 2019 levels, while Q4 capacity on sale remains at near to Q4 2019. Fuel costs are hedged 64% for 2022 and 42% hedged in 2023.   

Deliveroo shares also came under pressure after reporting an increase of 11% in Q1 GTV value of £1.79bn, a decent performance given the strong lockdown comparatives of 12 months ago. Unfortunately, investors had higher expectations of £1.86bn which has prompted some disappointment and sent the shares back towards their recent lows. It was felt that the recent deals with Amazon and Waitrose might prompt a better performance and help push UK and Ireland GTV closer to the £1bn mark. For 2022 Deliveroo maintained their GTV guidance of between 15% and 25%, with management expecting H2 to deliver the uplift that has so far been lacking year to date. This comes across as a big ask given that the cost-of-living crisis has barely begun, which suggests the prospect of some downside risk to the company forecasts.

On the plus side BP and Shell shares are higher on the back of a rebound in crude oil prices, which have recovered from three-week lows yesterday, as concerns over supply relative to demand continue to generate chop, against further talk of a Russian oil embargo by the EU.   

US

US markets opened modestly higher in early trade after the latest US CPI numbers raised the hope that the surge in price pressures we've been seeing over the last 6 months might be starting to show signs of topping out. A slightly weaker than expected core reading of 6.5%, against a bigger than expected headline reading of 8.5% appears to have prompted some weakness in US yields, however that doesn’t change the fact that US inflation is still at its highest levels since 1982.

While the numbers are encouraging there had been a widespread expectation that they could well have been a lot worse, and this has prompted some paring back in US yields, which in turn has supported a rebound in stock markets.

Today’s rebound has been largely led by the Nasdaq 100, as well as the Russell 2000, although with energy and food price inflation still looking strong it still seems too early to make any assumptions especially when considering what oil prices are doing today.

FX

The US dollar has given up some ground after the latest US CPI numbers for March came in more or less in line with expectations. Headline CPI rose by 8.5%, slightly above expectations, while core prices rose by 6.5%, slightly below expectations, in a sign that inflation pressures could well be close to easing. That certainly appears to be how markets are reacting to today’s numbers, however we are only talking one month’s data and the picture could well change if tomorrow’s US PPI shows little sign of slowing down.

The pound has continued to struggle, after the latest BRC retail sales numbers showed a slowdown in March, compared to a year ago. On the unemployment front there was more positive news as the rate fell back to 3.8% for the 3 months to February, while wages including bonuses rose by 5.4%, from 4.8%. While this is welcome news, it still means that in real terms workers are undergoing the biggest squeeze to incomes since 2013, with ordinary wages only rising by 4%, excluding bonuses.

The best performers today have been the commodity currencies of the Australian dollar and Norwegian Krone, while we’ve also slipped back against the Japanese yen.   

Commodities

Brent crude prices have seen a strong rebound today after hitting three-week lows yesterday, as chatter about an EU oil embargo on Russian supply starts to do the rounds again. While IEA members plan to release up to 240m barrels of extra supply over the next six months there is still some concern that may not be enough to ease a shortage, especially if China starts to relax its covid restrictions over the next few weeks.  

Gold prices took a sharp move higher hitting 4-week highs, in the wake of this afternoon’s US CPI number, which hit its highest level in over 40 years at 8.5%. The decline in US yields might seem counterintuitive, however given the rise we’ ve seen in rates over the last week, so we were overdue a bit of a pullback.       

Volatility

AT&T was propelled into the spotlight in terms of price action yesterday, following the completion of a spin-off of its WarnerMedia business, along with the parent company receiving support from analysts. Shares jumped noticeably at the open, with momentum continuing to build during the session, driving daily vol to 751%, well ahead of the monthly reading of 165%. Soc Gen also saw a marked uptick in activity off the back of its decision to exit Russia, with the move helping reverse some of the losses from earlier in April, driving daily vol to 222%, up from 92% on the month.

Lumber prices are back in focus after reports that demand had been hit hard by rising interest rates diminishing home renovation projects in North America. The underlying traded in a range of as much as 13% on Monday, settling close to two and a half month lows. Daily vol sat at 361% against 212% on the month.


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