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European markets continue to edge higher, but FTSE 100 lags

It’s been another broadly positive session for European markets, with the DAX pushing up to an 11-month high after the latest German ZEW survey saw the expectations index move into positive territory for the first time since February last year, although the current situation index remained firmly anchored in negative territory.

Europe

The FTSE 100 has underperformed despite briefly pushing up to a new 4 year high, with the record high at 7,903 remaining tantalisingly just out of reach. Today’s main drag on the UK benchmark has been the more defensive sectors of healthcare, with some underperformance from some big caps like Unilever, AstraZeneca, and HSBC.  

Ocado shares had until today been the best performer on the FTSE 100 year to date, rising over 30% since the end of last year, after a 2022 that saw the shares more than halve. Today’s Q4 trading update has undone a third of that with the shares sharply lower after the company reported a less than expected rise in revenue of 0.3% to £549.4m. This was well below the company’s prediction that they would see mid-single digit sales growth. In its defence Ocado did warn in Q3 that Q4 sales were likely to be affected by energy cost headwinds, which would in due course weigh on profitability, so this miss shouldn’t be too surprising. Today’s news is still disappointing with the company warning that customer basket sizes would probably keep falling in 2023, and it is this that is probably causing today’s share price weakness. Average basket value was down 1.3% year on year.

For the full year, revenue was down 3.8% to £2.2bn, despite an increase in full year average selling prices of 4.4%, however a 12.1% annual decline in basket volumes has offset that. The company said it was still on target to break even on an EBITDA basis for the full fiscal year. Ocado also managed to grow its market share to 12.3%, from 11.7%, however it is clear that margins are likely to continue to get squeezed in what is an extremely competitive groceries market.

Diageo shares are higher after announcing a further acquisition, buying Don Papa Rum, a premium brand from the Philippines for €260m, as it continues to add to its portfolio of premium brands. Last year Diageo added Casa UM which helped boost its Latin America sales by 45%

We got a further insight into the UK housing market today with Crest Nicholson as the housebuilder reported profits after tax of £26.4m, a decline of 63%. This was despite a 16.1% rise in revenues to £913.6m, while completions rose by 13.6% to 2,734. The main reason for the decline in profits was a £105m charge in respect addressing fire safety issues on all buildings of 11m and over. Operating margins were also lower, falling 770bps to 4.2%. 

US

US markets initially opened lower after their long weekend break, after the latest Empire manufacturing survey showed economic activity plunged in January to -32.9 from -11.2. The various components of employment, prices paid, and new orders all came in weaker than expected, showing that in manufacturing at least the US economy is slowing sharply.

We recovered off the lows after reports emerged that the ECB was considering slowing the pace of its own rate rise path after implementing a 50bps rate rise in February. 

Goldman Sachs shares saw a strong rebound last week in anticipation that we would see management look to focus on improving margins, against a backdrop of a slightly weaker trading performance in Q4. In the last few days, we’ve heard reports that the bank is looking to cut 3,200 jobs in underperforming parts of its business, with large losses expected in its new retail operation.

Today’s Q4 and full year numbers appeared to be the worst of all worlds, with Q4 revenues coming in at $10.59bn, below expectations of $10.7bn. On the various business units, equities trading revenue fell 5% to $2.07bn, while FICC performed well with $2.69bn, an increase of 44% from a year ago, while advisory also did well. That was where the good news ended, with its retail banking unit lost almost $2bn over the year. Asset and wealth management revenue also fell by over 25% to $3.56bn. Loan loss provisions were increased by another $972m. The banks costs also went up during Q4, rising by 11% to just over $8bn, although on the year they were slightly lower, coming in at $31.16bn for 2022. 

Moving onto Morgan Stanley’s Q4 numbers, and revenues came in slightly ahead of expectations at $12.75bn, with investment banking helping to drag the numbers up, with $1.25bn in revenue. Equities, and FICC sales trading both came in shy of expectations at $2.18bn, and $1.42bn respectively. Wealth management was also a strong performer with $6.63bn.  Morgan Stanley also upped its loan loss provisions to $87m, only slightly below the $101m they set aside in Q2, taking the total to $280m for the year.

The continued rise in bitcoin to two-month highs is helping to boost the crypto sector, with the likes of Marathon Digital, Riot Platforms, Coinbase and Silvergate Capital also pushing higher  

FX

The pound has got a lift to the 1.2300 area after the latest weekly wages numbers showed a rise of 6.4% in the 3 months to November, a record high outside of the pandemic. With some sectors of the economy showing much firmer wage growth than the headline average, well above 10%, and while vacancy rates still remain well over 1m the Bank of England will be hard pushed to avoid not pushing rates up by another 50bps when they meet at the beginning of next month.

The euro initially edged higher after ECB chief economist Philip Lane said that rates had some way to go before getting into restrictive territory. The upside proved somewhat limited on a report that the ECB was considering slowing the pace of any rate rises after a 50bps rate rise in February, to a slower pace of 25bps.

The Japanese yen has undergone a relatively subdued session ahead of tomorrow’s Bank of Japan rate decision, as caution takes over ahead of what could be a volatile session if markets don’t like what the central bank has to say when it comes to the next move on monetary policy.

Commodities

Crude oil prices have resumed their upward track on renewed hopes that Chinese demand will see a strong rebound as the economy continues its reopening process. In its monthly report OPEC said it expected Chinese demand to strongly this year, and that global demand would rise by 2.2m barrels per day, although this could be revised upwards. This of course assumes that any recovery will be V-shaped and depletes Chinese inventories rapidly.

On the latest economic data, the Chinese economy does appear to have started to recover in December and appears to be in better shape than was forecast. This of course assumes you believe the headline numbers, which showed the Chinese economy delivered 0% growth in Q4, and retail sales improved to -1.8% to finish the year.    

Volatility

The closure of US markets for Martin Luther King Day served to significantly reduce volatility right across the board. Q4 numbers from Rio Tinto however fell short of expectations and as a result lead to some elevated levels of price action for the mining heavyweight. The Australian listing of the shares was the real stand out here, with daily vol advancing to 57.52% against a one month reading of 32.79%. Downside here was arguably exacerbated by reports out of China that the government was ready to crack down on soaring iron ore prices, news that acted as a drag on peer BHP. One day vol here printed 36.7% against 29.96% for the month.

The absence of traditional market volatility seems to have delivered for cryptos, with bitcoin locking in gains above the $21,000 level. The more exaggerated levels of action were however seen in alt coins, with CMC’s proprietary Emerging Crypto Index posting one day vol of 85.82% against 43.8% on the month.

And rounding off with fiat currencies, the euro continued to give back last week’s gains over the Swiss franc. Dovish analyst calls regarding the ECB’s monetary policy stance could be behind at least some of the weakness here, but one day vol on euro-swiss printed 7.14%, a fraction up from the one month reading of 6.94%. The cross continues to trade above parity for now.


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