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US dollar weakness sends equities to second successive monthly gain

US dollar with a downward sloping red arrow

It’s been a positive end to what has been a strong month for European stock markets, with the DAX retracing almost 60% of its losses from the highs in January after rebounding from 23-month lows in October, as it looks to close over 8% higher on the month.

Europe

The FTSE100 has also seen strong gains, getting to within touching distance of the 7,600 level and its highest level since early June, and up almost 7% this month, as a slide in the US dollar and an expectation that inflation has peaked help to lift markets as we head towards year end.

What’s been more surprising is the companies that have helped drive the rebound in the UK blue chip index, at a time when UK food price inflation soared to a new record high.

This month’s strong gainers have been in retail with Frasers Group, Ocado, JD Sports and B&M European Retail, all of whom have seen gains of more than 27%, although they also happen to be among the worst performers year to date as well.

There’s been little if any reaction to the news that the UK plans to relax the rules that requires banks to separate their investment banking operations and their retail operations. This is largely because Lloyds and NatWest have much smaller investment banking operations than they did over 10 years ago.

US

US markets opened little changed ahead of this afternoon’s Fed chair Jay Powell speech to the Brookings Institute, however given the gains seen so far this month, and as we are coming into the end of the month its perhaps not surprising that there’s little enthusiasm to move markets one way or the other.

The latest US economic data was a mixed bag. The latest ADP payrolls report for November was a little on the weak side at 127k, while Q3 GDP was revised higher to 2.9%. However, the Chicago PMI was an absolute shocker falling to its lowest level since June 2020 at 37.2, while pending home sales for October fell by -4.6%.

After another positive day for Chinese markets, we’ve seen the likes of Alibaba, JD.Com and Tencent continue their recent rebound in anticipation of a modest easing of some of the more onerous measures being implemented across China to keep Covid in check. The economic damage continues to make itself felt with another set of poor PMI numbers for November.

DoorDash shares are higher after the delivery company announced it was going to cut 1,250 jobs as it looks to get its costs under control. While DoorDash delivery volumes have remained resilient, its costs have soared while it also spent $8bn to acquire Wolt in Finland to expand its international presence.

After the bell we also get to hear from Snowflake as it gets set to post its Q3 numbers. For Q3 Snowflake upgraded its product revenue forecast to $500m to $505m while saying it expected to see this to rise to $1.92bn for the whole fiscal year. Snowflake has continued to grow its client base which now sits at 6,808, up from 6,322, in the previous quarter and 5,944 at the end of last year. Since then, the shares have slowly drifted back, hitting 4-month lows in October before a modest rebound.

Salesforce.com is also expected to update the markets. For Q3 Salesforce.com said it expected revenues of $7.82bn and profits of $1.20c a share, while also downgrading its full year revenue guidance to $31bn, and profits to between $4.71 to $4.73c a share, largely due to the strength of the US dollar, which is expected to contribute to a negative $800m exchange rate effect. Operating margins are expected to remain steady at 20.4.

FX

The US dollar has slipped back a touch, pulling back from one-week highs, ahead of this afternoon’s speech by Fed chair Jay Powell, with the greenback closing in on its biggest monthly loss in 12 years. The ADP employment numbers for November showed that job growth slowed to 127k, below expectations of 200k, with some big declines in the construction and manufacturing sector, however services jobs rose 213k.

The Australian dollar has edged higher for the second day in a row despite headline inflation falling more than expected in October, dropping from 7.3% to 6.9%. This is further evidence that rather than seeing further gains, that inflation is showing signs of slowing and that we could well have seen the peaks.

It’s been a similar story for the euro which has also edged higher, despite a similarly bigger expected fall in headline CPI for November from 10.6% in October to 10%.

The pound has held up well despite fresh comments from Bank of England chief economist Huw Pill, who has followed in the footsteps of former MPC official Michael Saunders, saying that Brexit had fuelled the sharp rise in inflationary pressure.

While that may be true it doesn’t account for the fact that inflation in the euro area is even higher, certainly on the PPI measure. Maybe that’s because of Brexit too? It could be that it’s easier to blame Brexit than take responsibility for the policy failures of the Bank of England itself, who fuelled the current inflationary surge by being too slow to tighten policy when it became apparent that inflation was rising too quickly.  

Commodities

Crude oil prices look set to build further on the gains of the last two days ahead of this weekend’s OPEC+ meeting, where the cartel is due to meet virtually and mull over the possibility of a production cut. This seems unlikely now even as the market indulges in a spot of wishful thinking over the possibility that the Chinese economy will see a big reopening in the not-too-distant future. Nonetheless a decline in API oil stocks of 7.9m barrels last week has given prices a boost after hitting 10-month lows earlier this week, as has a big draw in EIA inventories of 12.58m barrels, while SPR crude stocks fell to their lowest levels since 1984.

Volatility

The financial sector remains topical as the week progresses, with HSBC seeing elevated levels of price action on Tuesday. The bank agreed the disposal of its Canadian business in a move which is being seen as going some way towards placating disgruntled shareholders and leaving the underlying stock to add around 4% over the session. One day volatility came in at 69.54% against 37.3% on the month.

As for commodities, again energies remain the most active with Goldman Sachs reportedly eyeing $110 a barrel for crude in the New Year. With next week’s OPEC+ meeting looming, the sector is likely to remain somewhat nervous and although there was no repeat of Monday’s snap-back for WTI Crude, bursts of intra-day activity were seen. One day volatility on the US Crude contract printed 53.73% against 44.21% on the month.

Low Sulphur Gas Oil was also on the radar, with the underlying advancing by more than 4% on the day as it pulled back from two-month lows. That was sufficient to drive daily vol to 50.08% against 45.94% on the month.

As for currencies, it was some of the more marginal Euro crosses that stood out once again. EUR/CAD advanced to fresh eight-month highs during the day off the back of Canadian Dollar weakness as economic data spooked the market. Off the back of this, one day volatility here was recorded at 10.2% against 8.84% on the month.

 


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