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Banks outperform as equity markets slip back on tightening concerns

London skyline at night

European markets have given back some of the gains of the past few days after yesterday’s surprise hawkish interpretation of the latest Fed minutes, which saw US stocks take a tumble from their record highs of earlier this week.

Europe

Markets appear to have been spooked by the prospect that the Fed could well start to normalise policy at a faster rate than had originally been priced in for this year, largely due to discussions around the prospect of balance sheet reduction. This comes across as somewhat of an overreaction, given that the Fed is still currently expanding its balance sheet, a process that will come to an end in March.

As the day progressed European markets initially managed to pull off their intraday lows, however upside progress has proved to be difficult to sustain with US markets continuing to act as a drag in what has proved to be a very choppy session.

Despite the pressure on stocks, banks have continued to do well, helped by the prospect of higher rates, which in turn has helped push the likes of Standard Chartered, Lloyds and NatWest Group to the top of the FTSE100.

On the downside, the retail sector has struggled today despite Next reporting a decent performance over the Christmas period, as well as upgrading its profit guidance for the year, the fifth time the retailer has done so in the past 12 months.

Next PLC has been one of the few retailers able to navigate the problems posed by the pandemic in the last 12 months, and today’s trading statement has reinforced this once again.  

When Next reported back in November the company said it expected sales growth to slow to 10% in Q4, with concerns over supply chain disruptions potentially hindering stock availability.  These concerns were misplaced as it turned out with today’s Q4 numbers seeing full price sales to the 25th December rising by 20%, while full year profits have been upgraded to £822m, with an expectation that by year end that this could rise even further to £860m, with the company declaring a special dividend of 160p per share to be paid at the end of this month.

While today’s numbers were better than expected, management continued to express concern about the outlook for 2022, particularly around rising inflation, as well as the cost of living in general, and it is these concerns that appear to be weighing on the share price today.

Staying with the retail theme, B&M European shares have also slipped back despite upgrading its full year profit estimates after a strong performance leading up to the Christmas period. Full year EBITDA is now expected to come in between £605m and £625m, up from £578m.   

Greggs share price has also had a decent last 12 months despite the challenges posed by the pandemic as well as supply chain disruptions, with the shares hitting a record high at the end of last year. Today the shares have slipped back despite total sales for the full year coming in at £1.23bn, a 5.3% increase in pre-pandemic levels of £1.17bn. Greggs also said it expected to see full year results slightly ahead of its previous guidance when it is set to report its full year numbers on the 8th March, while expecting to make an additional £30-40m distribution to shareholders in 2022.

US

US markets opened somewhat mixed after yesterday’s sell off, after US weekly jobless and continuing claims came in slightly higher than expected.

The Nasdaq was initially looking good for a rebound in the opening half hour of trading, however a disappointing services ISM report for December temporarily put paid to that with the more highly valued areas of the market getting pummelled heavily.

Rivian Automotive saw further heavy selling after initially opening higher, falling below its $78 IPO price in the wake of yesterday’s news that Amazon had signed a deal with Stellantis for electric vehicles. Other EV manufacturers also came under pressure with Tesla slipping to its lowest levels since just before Christmas.  

FX

The US dollar has been a bit of a mixed bag today, with the Japanese yen being the best performer on the back of weaker equity markets. The “risk-off” tone is also hammering the Australian dollar which is the worst performer on concerns that higher US rates will prompt a wider slowdown in the global economy

The pound has been a bit of a mixed bag despite concerns that rising inflation pressures will prompt the Bank of England to raise rates again when it meets next month. UK company inflation expectations rose from 4.2% to 5% in December reinforcing these concerns, however the latest services PMI numbers for December pointed to a modest slowdown in price pressures, as the rate of inflation eased from the November peaks.

Commodities

Despite the weakness in equity markets, Brent crude oil prices have moved higher today, hitting their highest levels since 24th November, with many putting the move up down to the unrest coming out of Kazakhstan, which might potentially disrupt supplies.

Gold prices have also taken a leg lower in the wake of the higher yields being seen across the piste, with the US 10 year hitting its highest level since April last year, while the 5-year yield moved above 1.45% to its highest level since early February 2020.


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