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FTSE 100 reverses Friday losses, as financials and energy rebound

Canary Wharf skyline

European markets have enjoyed a decent start to the week in the absence of US markets with the FTSE 100 leading the way higher.

Europe

Banks are seeing a decent rebound with some solid gains, led by the likes of HSBC and Standard Chartered, with Lloyds Banking Group not too far behind, on the back of hawkish comments from Bank of England MPC member Catherine Mann, which sent UK yields sharply higher and 2-year yields to their highest levels since December 2008.

BP and Shell are also enjoying a modest rebound, as they look to pare some of the big losses we saw on Friday, when oil prices underwent their biggest daily decline in over a month.

On the downside, building and insulation maker Kingspan shares have taken a sharp dive to the downside, despite reporting a record first-half trading profit of around €415m, well above last year’s €329m. The slide appears to be in response to the comments that orders have deteriorated sharply over the last two months, with order intake for May and June sharply lower from last year.

This assessment appears to have bled through into other sectors including UK housebuilders, which has seen declines in the likes of Berkeley Group, Persimmon and Barratt Developments fall to the bottom of the FTSE 100, with Persimmon shares sliding to two-year lows.

Primark owner Associated British Foods share price has had a rough ride of late with the shares down sharply year to date, hitting nine-year lows in April. At the end of last year annual revenues fell to just shy of £13.9bn, as the retailer, which also has a food, sugar and agriculture business, battled against the scourge of covid lockdowns and restrictions. During the first half of this year the company reported a 25% rise in H1 group revenue of £7.9bn, while adjusted profit before tax rose to £666m, a rise of 109%. Its Primark business has been the main driver of this rebound, with sales rising to £3.54bn, with the UK business driving the recovery.

Today’s Q3 numbers appear to show that the worst is behind it now as group revenues rose 32% to £4.05bn, with the Primark business seeing an 81% rise to £1.73bn. This is hugely encouraging, with Q3 revenues for this segment now comfortably above the levels we saw pre-pandemic. Total revenues year to date have risen 29% to £11.93bn, with solid growth in all of its other business areas. In a nod to its lack of online operation, its Primark business is looking at trialling a click and collect service by the end of this year, in a number of stores on a range of children’s clothing as it looks to boost sales back to pre-pandemic levels. The company kept its full year outlook unchanged.

EasyJet shares are lower after the airline cut its capacity outlook for the rest of this year due to the various staffing problems facing the travel sector, not just because of shortages of staff in its business, but also due to staff shortages at the airport level. For Q3 the airline has said it expects capacity to be around 87% of 2019 levels, rising to 90% for Q4. These changes will have a cost impact which easyJet expects to be a one-off, as better long-term resilience gets built in over time.

US

US markets are closed.  

FX

Despite hawkish comments at the weekend from Fed governor Christopher Waller that he doesn’t care what’s causing the current surge in inflation, the US dollar has slipped back. His comments that it’s the Fed’s job to get inflation down, and that the central bank is “all in” even if it means unemployment rises to 4.5%, appears to have been taken in its stride, although with US markets closed there are probably fewer reasons to buy the US dollar today.

The commodity currencies are the better performers today, which is slightly counterintuitive given the weakness being seen in commodity prices today, with oil prices unchanged after their big falls on Friday. The pound has given up its early gains despite Bank of England policymaker Catherine Mann pointing out the very obvious fact that a weak pound means that inflation is likely to remain higher for longer, and that the central bank needs to be more aggressive when it comes to hiking rates. Her hawkishness contrasts with the more relaxed approach of other policymakers on the MPC, and recognises the fact that by the time the Bank of England meets again, US rates are likely to be higher by another 50bps to 75bps.

The euro has edged higher after ECB president Christine Lagarde restated the case for a rate hike later this month, as well as September, pointing to early signs of wage growth. She also maintained that the central bank was on course to create a tool to deal with possible fragmentation risk although details on it weren’t forthcoming.

Commodities

It’s been a fairly quiet day for crude oil prices today in the wake of Friday’s steep falls, with little in the way of drivers with US markets out on holiday.

Iron ore and copper prices have come under pressure today over concerns that the global economy is heading into recession. Copper prices hit a one year low today as concerns over the Chinese economy, over the rest of the year, prompted a reassessment of the demand outlook in the short term. Another lockdown in Shenzhen over the weekend appears to have fed into this bearish narrative.

Bitcoin prices have stabilised after briefly dipping below the $20k level over the weekend, however it still feels vulnerable to a wash out, on any move below $19,500.       

Volatility

Shares in London-listed fashion groups ASOS and Boohoo both continued to see elevated price action into the weekend break after bargain hunters moved in. Scheduled trading updates on Thursday rattled sentiment but evidently the downside was overdone, with both stocks managing to tack on more than 12% on Friday. Daily vol on ASOS printed 407% against 154% on the month, whilst Boohoo came in at 273% against 131%.

Crypto vol continues to abate after the panic seen at the start of last week in the wake of the Celsius suspension. The key reading to look at here is daily vol converging with the monthly print and this is being seen across the board. The most dramatic delta for this metric right now is seen on Bitcoin cash, sitting at 138% on the day versus 113% on the month.

The Yen found some short-lived support in the latter part of last week, but this wasn’t sustainable and as a result, a swift reversion followed with USD/JPY finishing the week back around the 135 level. That left daily vol on the pair for Friday at 18.67% against 10.92%, although action on the Swiss Franc was ever more pronounced as the market continued to digest that rate hike surprise from the SNB. Daily vol on Dollar Swiss came in at 24.84% against 11.65% on the month.

And as for equity indices, the South African benchmark found itself in focus. Some emerging market economies are seen as being particularly vulnerable to global recession risks and the SA 40 is very much in this cohort. It gapped lower on Friday morning following a market holiday, driving daily vol to 67% against 37% on the week.


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