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Dovish ECB sends euro towards two-year low

Christine Lagarde

Despite today’s positive session, it looks set to be another negative week for markets in Europe against a backdrop of concerns that central banks could well over tighten the hiking ratchet when it comes to normalising monetary policy to deal with an increasing inflation problem.

Europe

This doesn’t appear to be a problem with the ECB, which continues to show little sign of looking to hike rates after leaving rates unchanged at their policy meeting today, while being even handed over the risks facing the eurozone economy. Nonetheless sentiment this week hasn’t been helped by the latest Covid extended lockdown measures being initiated by Chinese authorities in Shanghai, in what is likely to be a fruitless attempt to stem the spread of the more contagious Omicron variant. In the wake of this afternoon’s ECB meeting, European markets managed to claw their way into positive territory, in the wake of ECB President Christine Lagarde’s press conference.  

One of the more notable takeaways this week has been how investors are paying more attention to how companies view the economic outlook than the fact that they have done well over the past 12 months. For example, Tesco has seen its share price decline this week, despite posting bumper profits, at the same time as warning about lower profits for 2023, as it looks to cushion some of the effects of the cost-of-living crisis on its customers as it widens its Aldi Price Match programme to 650 products.  

On the flip side we’ve seen decent gains for British Airways owner IAG on optimism that this summer could see a big rebound for airline stocks after US operator Delta Airlines said it was hopeful that its next 3 quarters would see a return to profit.  

After a negative day yesterday, consumer discretionary companies have had a slightly better day ahead of the Easter weekend, with Holiday Inn owner IHG, and Premier Inn owner Whitbread finishing the week on the up as the UK gets set for a warm holiday weekend.

Home furnishings group Dunelm is higher after a Q3 trading update which saw a 69% rise in total sales to £399m, from a year ago, when most stores were closed due to lockdown, and only click and collect and home delivery options were available. While the reopening of its store real estate has helped boost the wider numbers Dunelm has proven to be resilient to the challenges posed by the various lockdowns over the last two years and is in a stronger position than it was pre-pandemic.  That said its share price performance year to date has been disappointing, down over 20%, largely due to concerns over the economic outlook and the upcoming squeeze on consumer incomes.

Gross margins are likely to be a key pinch point over the next few months, and while they have risen by 30% over the last 12 months, rising costs could well impact these going forward. Management have said they expect gross margins for the full year to be in line with 2021 levels, largely due to building up inventory levels in anticipation of possible supply chain disruption problems. This of course has increased warehousing costs.

US

US markets have seen a mixed open after last night’s positive finish, after US retail sales for March rose by 0.5% and weekly jobless claims increased slightly from 167k to 185k last week.

After JPMorgan Chase reported its Q1 numbers yesterday, we have seen the likes of Wells Fargo, Citigroup, Morgan Stanley and Goldman Sachs report today.

Starting with Wells Fargo which is a much better barometer of the US domestic economy, Q1 revenues fell short of estimates coming in at $17.6bn, and net income fell short at $9.2bn. Lending patterns painted a mixed picture of the US economy, with consumer and small business banking rising 11%, while home lending was down 33%, with mortgage banking fees down 48%. Credit card spending was higher, up by 6% and in line with the recent consumer credit numbers. Costs also remained high, coming in at $13.9bn, which for a management that is looking to get on top of them was a significant disappointment.

Goldman Sachs Q1 numbers have seen the bank outperform across most of its business. Trading revenue came in at $7.87bn, comprising $3.15bn for equities and sales trading, and $4.72bn for (FICC) fixed income and trading, its best return in over 5 years, and which blasted through expectations of $3.12bn This appears to have been due to the pickup in volatility seen in commodity markets. Q1 net revenue came in at $12.93bn, beating expectations by over $1bn, while profits came in at $10.76c a share, well above expectations of $8.90c a share. Unlike its peers’ expenses have seen a big fall, coming in at $7.72bn. Like JPMorgan, Goldman has set aside $561m in respect of provision for credit losses related to growth in its credit card portfolio.

Morgan Stanley Q1 numbers have proved to be more of a mixed bag, although on net revenues they beat expectations, coming in at $14.8bn, while profits came in at $2.22bn, or $2.06c a share. Equities sales and trading drove most of the outperformance, coming in at $3.17bn. FICC trading also saw a beat, with $2.9bn, well above forecasts of $2.1bn. Wealth management revenues also fell short of estates coming at $5.94bn, below estimates of $6.19bn, but still a lot higher from where they were in Q4, when they dropped below $5bn.

Citigroup rounds off today’s look at Q1 with decent beats on revenues and profits as CEO Jane Fraser continues the turnaround process on this well-known US name. Q1 revenues came in at $19.2bn, while profits were $2.02c a share, both above expectations. FICC sales and trading saw a return of $4.3bn, beating expectations of $3.98bn, and a fall of 1% from a year ago. As with other US banks, equity sales and trading revenue helped drive the revenue beat, coming in at $1.53bn. Expenses came in higher than expected, not surprising perhaps given the restructuring process currently being undertaken, rising 15% to $13.17bn. Citigroup has also reduced its Russia exposure from $9.8bn to $7.8bn. The bank has set aside $1.9bn in respect of potential losses with a worst-case scenario now set to be in the region of $2.5bn to $3bn.

When Tesla CEO Elon Musk took a 9.2% stake in Twitter and then declined to take a position on the board there was much speculation as to his motives for not accepting the role. Today Musk took the decision to table a $54.20 cash offer for the business, an 18% premium on yesterday’s closing price, saying that it was a full and final offer for the business, and that he had no confidence in the current management. The big question for the Twitter board now is whether to accept a very generous offer for a business that has been a serial underperformer, and tends to treat its users with indifference.

Early share price action appears to suggest little enthusiasm on the part of investors with the shares opening below $50 and struggling to make any sort of traction. This seems rather an odd reaction unless you believe that the board will reject Musk’s offer, or you believe Musk isn’t serious about his offer. In any event a rejection could then prompt Musk to sell his shareholding, sending the share price back down to where it came from. Given the recent share price performance of Twitter they ought to be ripping his arm off, because it’s unlikely they will get a better offer from anybody else.   

FX

It’s been a positive week for the US dollar, hitting its highest level against the Japanese yen since 2002, while underperforming against the pound. The pound’s outperformance comes across as all the more puzzling given that some of this week’s economic data suggests that the Bank of England might get cold feet when it comes to raising rates next month.

The euro has finished the week on the back foot after the European Central Bank gave little indication that it was in a hurry to raise rates. While it was notable that the ECB was keen to stress that the APP programme would be coming to an end by the end of Q3, there was no indication that they would be prepared to go in the opposite direction and start quantitative tightening. This keeps it on a divergent path from other central banks, with the euro slipping below 1.0800 for the first time since April 2020.   

Commodities

After two successive weekly declines and dropping to two-month lows earlier in the week Brent crude prices have rebounded and look set to finish the week higher as markets try to square an increasingly difficult geopolitical calculus when it comes to supply and demand.

Chinese authorities have continued to double down on their zero-covid policy, raising concerns about a sharp demand slowdown. On the flip side, the prospect of any cessation of hostilities between Russia and Ukraine is further away than ever, helping to underpin prices as pressure continues to build on the likes of Germany to boycott Russian oil and gas.  

Volatility

Shares in ASOS saw a second consecutive day of exaggerated price action on Wednesday in the wake of half-year earnings news. There had been speculation over what this reading would look like, but a revenue miss, and fears that inflation will damage performance further in H2 are certainly taking a toll. Daily vol pushed out to 219%, slightly up from Tuesday’s 203% and against a monthly print of 106%.

Commerzbank and Deutsche Bank both managed to recover some of Tuesday’s losses after Capital Group sold significant stakes in both entities. Trade has been somewhat choppy with the result that volatility remains elevated – Commerzbank printing 161% on the day and Deutsche Bank 167%. This also drove interest in CMC’s EU Banks share basket for a second session, with daily vol here coming in at 73% against 57% on the month.

In fiat currencies, the New Zealand Dollar has been in focus after the country’s Reserve Bank announced its biggest rate hike in 22 years, trumping market expectations in the process. The kiwi has as a result made notable gains over the US Dollar, but it’ s also stoking global inflation fears. Daily vol on the pair was recorded as 12.9% against 10% on the month.

And rounding out with commodities, Lumber remains the stand out here with prices continuing to slide – or normalise - amidst weakening demand. The underlying is testing fresh lows for the year, but the risk here has to be that supply disruption could initiate a prompt reversal. Daily vol printed 220%, although that’s not much ahead of the monthly reading which now stands at 214%.

With the Easter weekend approaching, the next volatility report will be published on Tuesday 19 April.


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