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Barclays weighs on the FTSE 100, as banks lag

Barclays branch sign

It’s been a more positive session for European markets today, despite disappointing flash PMI numbers from France, Germany, and the UK, which pointed to continued economic weakness in October.

Europe

While the DAX and CAC 40 have spent most of the day in positive territory, the FTSE 100 has lagged due to underperformance in the UK banking sector which is acting as the main drag, due to a negative reaction to Barclay’s latest Q3 results which came up short of expectations. With the shares closing just above the August lows yesterday, there was a case for arguing that a lot of bad news was already in the price having tried and failed to rebound meaningfully over the last five months.

Today’s Q3 results have served to deepen the gloom further with the shares sliding to 6-month lows, and close to the lows in March, after Q3 revenues came in at £6.26bn which was slightly below expectations. Key amongst the reason was its corporate and investment banking arm delivering a 6% decline in revenue to £3.08bn. Profits before tax also came in lower at £1.89bn, with the bank setting aside £433m in respect of impairment charges.

Like its US counterparts, the equities division had a solid quarter, with revenues of £675m, however FICC underperformed expectations with £1.15bn. When Barclays reported in Q2 their expectations for net interest margin were for a number in the region of 3.15%. This came in line with expectations, however Barclays said that this was expected to slow to between 3.05% and 3.1% for the full year, suggesting that we could well be at the high point of the margin cycle, with the bank suggesting the scope for cost cuts by year end.

In a sign of further weak demand for the UK economy, the fall in customer deposits, which fell to £243.2bn either suggests that customers are cutting into their savings, or going elsewhere, while whole loans remained steady at £205bn. Today’s weakness in Barclays share price has served to weigh on Lloyds and NatWest who report later this week with the entire sector serving to act as a drag on the wider index.

Also falling sharply today has been Bunzl which also underwhelmed with a disappointing set of Q3 numbers, as revenues fell 4.7% which the company put down to post-pandemic normalisation trends, and a decline in Covid-19 related product sales. The company reiterated its 2023 adjusted operating profit growth outlook.  

US

US markets have opened modestly higher helped by some positive earnings announcements which are serving to provide a lift in early trade, with the main focus on tonight’s quarterly numbers from Microsoft and Google owner Alphabet.

Coca-Cola shares have edged higher after reporting an increase in Q3 revenues of 8% to $12bn, comfortably beating expectations along with profits of $0.74 a share. The drinks company also upgraded its full year guidance for revenue and profits growth to 11%, and 7% to 8% respectively.

GM shares have also got an uplift despite removing guidance due to the strike action by UAW workers. The car company also said it was abandoning its goal of building 400k EVs from 2022, pushing to mid-2024.

On the earnings front we have the latest numbers from Microsoft and Google owner Alphabet due to be released after the close.

The move higher in the Nasdaq this year has seen the wider tech sector drive most of the gains in US markets year to date. Microsoft along with the rest of the so-called “Magnificent 7” has seen strong gains since the October lows of last year, with the shares hitting a new record high back in July, after reporting a strong set of Q4 and annual numbers. Q4 revenues saw an increase of 8% to $56.2bn, a new record for an individual quarter, pushing total annual revenues to $211.9bn, with profits coming in at $2.69c on the quarter and $9.68c on an annualised basis. For this Q1 Microsoft said it expects to see revenue growth in Azure to slow to between 25% and 26% in Q1. This compares to 42% last year and 48% revenue growth the year, with some disappointment that the move into its OpenAI hadn’t delivered a higher estimate. Q1 revenues are expected to come in at $54.5bn, with commercial cloud expected to deliver $30.7bn, up from $25.7bn a year ago

Alphabet’s Q3 total revenues are forecast to increase to $75.5bn, with YouTube set to increase to $7.7bn and Google Search to increase to $43.2bn. Profits are expected to come in at $1.45c a share. Losses in other bets is expected to slow to $1.2bn

FX

The Australian dollar is the best performer after the RBA's Governor Bullock said that the Australian central bank had a very low tolerance for any deterioration in the inflation outlook, prompting a bout of short-covering, with the currency just above one-year lows, and down over 6% from its summer peaks.

The US dollar has gained traction after US manufacturing and services PMIs came in at 50 and 50.9 respectively in a sign that the US manufacturing recession could be coming to an end. This outperformance on the part of the US has seen the euro come under pressure after worse than expected French and German PMIs pointed to the prospect of a prolonged slowdown in Europe’s two largest economies. The poor nature of the numbers also increases the likelihood that even if it wanted to the ECB won’t be able to push rates any higher, given the extent of the slowdown being experienced across Europe. Comments from ECB president Christine Lagarde that the fight against inflation is going well and that economic risks are very much to the downside would appear to suggest that the ECB is done.

The pound is also under pressure for the same reason although the PMIs aren’t anywhere near as weak, we can see that price pressures are slowing along with the possibility of a Q3 contraction, and stagnation in Q4. With the Bank of England due to meet next week, it’s likely the MPC will err on the side of caution and keep rates on hold, although we could well see a split decision again.

Commodities

We’ve seen some of the heat come out of the gold price rally in the past couple of days as the failure to push above the $2,000 an ounce level prompts some level of profit-taking after the big rally from the October lows of $1,810.

Crude oil prices have slipped back for 2-days in a row, with speculation that the Israeli ground invasion is being pushed back to allow more time for the release of hostages inside Gaza. The downside pressure is likely to be limited given that Israel has continued to bombard Hamas positions in Gaza as well as Hezbollah positions in Lebanon.

Bitcoin has seen a big surge higher in the past few days on speculation that we could get to see the creation of a bitcoin (ETF) exchange traded fund, which appears to have prompted a sharp short-covering rally to $35k and a 5-month high.

Volatility

Tesla stock wobbled on Monday morning after the company noted in financial filings that it was under investigation by regulators on several counts. Downside pressures proved to be limited across the session however with the stock rebounding to close fractionally higher. One day vol printed 111.79% against 67.52% for the month.

Better than expected consumer confidence data from the Eurozone helped pull Euro-Swiss away from those recent lows on Monday, with the cross now trading more than 1% up from the levels struck ahead of the weekend break. PMI data from the trading bloc then the latest ECB rate call will both have the potential to provide further direction in the near term, but one day vol printed 5.97% against 5.34% for the month.

Bitcoin remains in favour and advanced a further 10% during Monday’s trade, moving out to levels not seen in 18 months. Hopes that US regulators will approve a Bitcoin ETF continue to drive sentiment here, with one day vol on BTCUSD coming in at 47.44% against 37.15% for the month. Price action on other crypto assets was even more notable, with Solana printing 102.42% on the day and 63.55% on the month.

And Copper prices tested year to date lows on Monday morning before staging a meaningful rebound. However, with no apparent movement in the fundamentals here, this could prove to be an unsustainable technical rebound. One day vol on the metal sat at 23.44% against 20.31% for the month.


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