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Market update

European markets tread water as the Bank of Canada hikes rates by 25bps

It’s been another cautious day for European markets with little in the way of overall direction. They opened lower after exports in China plunged by -7.5% in May, a sharp fall from the 8.5% gains seen in April, raising concerns about the outlook for global demand. 

On the data itself, imports were slightly better than expected, indicating that Chinese domestic demand was slightly stronger than expected, but it was a low bar given that they were still negative to the tune of -4.5%. The investor caution is understandable given that today’s numbers out of China are the latest example of global economic data that has pointed to a weak demand outlook, at a time when interest rates appear to have further to rise. 

Europe

This is being reflected in short-term yields which have continued to push higher, in anticipation that rates are likely to remain higher for longer. These higher yields, along with the latest survey of house prices from Halifax that showed house prices were falling, has weighed on housebuilders today, with weakness in the likes of Persimmon, Berkeley Group and Taylor Wimpey. 

Despite this drag, the FTSE 100 is being helped by gains from Vodafone, on reports that the telecoms giant is working through the final details of the merger of its British operations with Hong Kong’s Hutchison Holdings, which runs the Three network. BT Group is also higher as it continues to recover the losses from last week, after the Amazon story that it was entering the mobile phone market to provide a service to its US Prime customers. 

Zara owner Inditex shares have pushed up to six-year highs after reporting a better-than-expected set of Q1 numbers. Net sales rose by 13% year on year to €7.61bn, while profits rose to €1.17bn, an increase of 54% on the previous year, while margins edged up from 60.1% to 60.5%. The retailer also said that Q2 had got off to a strong start offering encouragement and a lift to the wider retail sector, helping to give a lift to the likes of Primark owner Associated British Foods and Marks & Spencer. 

Harbour Energy shares are slightly higher on reports that it is in talks with US-based Talos Energy with respect to a merger in a move that would see the UK based oil and gas company shift its focus away from the UK after having seen most its 2022 profits disappear because of the UK governments windfall tax, which is set to stay in place until 2028. 

Harbour had already announced earlier this year it would be scaling back its UK operations due to the windfall tax move. The company also declined to enter the bidding for the new round of oil and gas licences, as well as announcing that capex for the year would be $200m lower due to the decision not to proceed with several North Sea exploration and appraisal wells which would surely have gone ahead if the company had been able to hang onto its $2.45bn profits.    

Harbour is already partnered with Talos in an oil and gas field in the Gulf of Mexico and this move, if it plays out, would see it leave its existing UK business to carry on, but not grow in any meaningful way as it shifts its priorities elsewhere. The move would also give Harbour the possibility of a US listing which would then give the combined business the option to delist in the UK completely thus dealing a further blow to the UK’s reputation as a place to do business. 

Both parties have refused to comment on today’s reports, however at a time when energy security ought to be the governments number one priority, the idea that Harbour might be considering such a move is a damning indictment of the UK’s current energy policy, as well as its wider policies towards business.

US

US markets also opened higher, but the gains are still very incremental in nature. It’s almost as if investors are playing a game of two steps forwards, and one step back, lest they be caught out by an unexpected bearish development.

Tesla shares are higher after it was confirmed that all Model 3cars are eligible for full tax credit treatment under new criteria for the inflation reduction act and the transition to electric vehicles.

Netflix shares are higher after being on the receiving end of broker upgrades based on the crackdown on password sharing which could generate extra revenue.

GameStop shares are also seeing gains ahead of their Q1 numbers which are being released after the closing bell. In Q4 the company posted a surprise profit of $0.16c a share, helped by a $4.5m boost from the sale of some digital assets. The company offered no guidance at the end of last year as management looked to turn around a business that has been ailing for several years. Management have been successful in cutting costs as well as withdrawing from non-core markets, however they have been hampered by some poor decisions, the partnership with failed crypto exchange FTX, as well as experimenting with NFT at around the same time the bottom fell out of that market. For Q1 revenues are forecast to fall to $1.34bn, with losses of $0.17c a share.

Boeing yesterday said it was delaying deliveries on its 787 Dreamliner due to a defect in the aircrafts tail section. Boeing went on to say that there wasn’t a safety issue and wouldn’t say whether there were any existing aircraft that might be affected by the issue, which isn’t exactly comforting given the company’s recent safety record. Boeing said the issue wouldn’t affect its forecast for full year deliveries.

FX

The Australian dollar has continued to build on its gains of yesterday on expectations that the RBA may well have to go a lot further when it comes to additional rate hikes in the coming weeks as it looks to regain control of the inflation narrative. When compared to its peers the RBA, like the ECB is well behind the curve when it comes to raising rates.

Nonetheless the US dollar is slipping back across the board as traders’ price in fewer rate hikes from the Federal Reserve going forward than amongst its peers.

The pound is continuing to find support from higher interest rate expectations as traders’ price in a higher terminal rate from the Bank of England due to stickier inflation expectations. 

The Canadian dollar has jumped to one-month highs after the Bank of Canada went against expectation and raised rates by 25bps to 4.75%. The expectation had been for no change, however as we warned in this morning’s note the odds of a hike were higher given that recent data had been stronger, and the fact that the RBA hiked earlier this week. The Bank of Canada also tweaked its guidance about the need for further rate hikes, giving themselves more flexibility if, and when they decide to look at a pause.

Commodities

The weaker US dollar has seen crude oil prices undergo a modest rebound after the declines of the last couple of days. The sharp decline in Chinese exports should have acted as a drag, however given how close oil prices are to their recent lows, further downside is likely to be limited by the fact that the US government is going to be on the bid as it looks to replenish the SPR between now and August. 

Volatility

Word from Boeing that a production defect could slow deliveries of new aircraft served to rattle the company’s share price on Tuesday. The underlying sold off by around 5% on the back of the news, although the initial losses appeared to be somewhat overblown with a marked recovery following. One day volatility stood at 111.39% against 45.76% on the month.

CMC’s proprietary basket of gaming stocks again saw elevated levels of price action, with analyst upgrades bolstering the performance of heavyweight constituent AMD. One day vol on the contract printed 44.47% against 29.57% for the month.

Cryptos remained active, with Bitcoin recovering all of Monday’s losses by last night, returning to levels around the $27,000 mark. One day vol on Bitcoin against the greenback hit 48.49% compared with 35.01% on the month.

The Nikkei posted another up day on Tuesday, posting fresh three-decade highs as a result, although signs of profit taking have since been noted.  One day vol on the equity index sat at 19.54% compared to 15.48% for the month.

And in fiat currencies, it was the Australian Dollar that was the standout for price action after the RBA pushed through another quarter point hike for interest rates. Whilst this was broadly expected, the accompanying narrative indicated that further policy tightening could still be seen. The most active currency trade was the GBP/AUD cross, with one day vol of 10.06% against 7.5% for the month.


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