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FTSE 100 underperforms as investors pull the plug on water companies

European markets have continued their recent patchy performance, with the FTSE 100 under pressure due to weakness in utilities and retail.

European markets have continued their recent patchy performance, with the FTSE 100 under pressure due to weak utilities and underperformance in retail, while the likes of the DAX and CAC 40 have been slightly more resilient.

Europe

Water utilities Severn Trent, United Utilities and Pennon Group are sharply lower, as the increased media focus on Thames Water’s problems and a possible nationalisation, has shifted the balance of risks towards the entire sector. It has also brought a sharper focus over how these water companies spend their money, and could be regulated in the future, with criticism over leaky pipes and sewage discharges invites greater regulation.

B&M European Retail shares have slipped back to their lowest levels in 2 weeks, despite reporting strong sales in its Q1 numbers. Total group revenues rose 13.5% to £1.32bn, with B&M UK posting sales of over £1bn, an increase of 11.3%. Today’s share price weakness may have more to do with the fact that the shares traded at their best levels since February 2022 yesterday, amidst disappointment that management decided not to upgrade guidance. 

Rolls-Royce shares have also slipped back after a UBS note that posited a risk that flying hours could be a downside risk when the company next reports in August. Market expectations are for H1 EFH to come in between 80% to 90%, however there is a risk this could come in closer to 80%.

On the plus side, Ocado shares have rebounded after a correction of a report that Amazon had denied it was interested in making a bid for the online grocer. Amazon said it wasn’t prepared to comment one way or the other. 

H&M shares have jumped to their highest levels since February 2022 after reporting better than expected operating profits for Q2, following a trend in retailers that are seeing resilient consumer demand. We’ve already seen the likes of Next, Zara owner Inditex and Primark owner AB Foods report that recent trading has been more resilient, and today’s H&M numbers have continued  that theme. While there was a slight miss on gross margins there was clear progress on reducing inventory levels as well as optimism that operating margin could rise to 10% by the end of next year, from 8.2% which is where it is now. H&M also said Q3 has got off to a good start.

US

US markets opened mixed after a strong set of economic numbers which saw that the US economy grew by a much greater amount in Q1, driven strongly by consumer spending, while weekly and continuing claims both fell back to 239k and 1742k, respectively. The rise in yields and the US dollar appears to be acting as a bit of a drag on the Nasdaq 100.

Micron Technology shares initially opened higher, before slipping lower after reporting Q3 revenues that were better than forecast, although they were still down by 57% year on year at $3.75bn Losses were also lower than expected at $1.43c a share. For Q4 guidance for sales was raised to an upper boundary of $4.1bn, with an expectation that margins would also improve over time, although losses are expected to come in above forecasts between $1.12c and $1.26c a share. CEO Sanjay Mehrotra also said he expected chip demand to pick up considerably over the next 12 months, but that hasn’t been enough to keep the shares above water.

Nvidia shares opened higher after getting aa price upgrade from Piper Sandler

US banks are also in focus after the publication of the latest stress test results on 23 of the biggest banks saw them all pass quite comfortably, although none of the tests included a scenario of rapidly rising interest rates which accounted for the demise of Silicon Valley Bank, First Republic, and Signature Bank. The biggest US banks performed well as expected, while lower down the food chain there was a more mixed response. Goldman Sachs and JPMorgan Chase are seeing solid gains, along with Wells Fargo.

Apple shares are also in focus after closing at a record high yesterday and posting a new record high today of $190, today still shy of that $3trn market cap that the market appears to want to test.

FX

It was all change for the US dollar in the aftermath of this afternoon’s US Q1 GDP revisions and weekly jobless claims numbers. An upward revision to 2% from 1.3% along with a big upgrade to personal consumption to 4.2%, saw yields jump sharply and the greenback reverse all its intraday losses. 

Weekly jobless claims also fell back to 239,000 highlighting once again the resilience of the US labour market, and reinforcing Powell’s comments earlier today that the FOMC sees two, or more rate hikes by year end.

The pound has had an indifferent session despite better-than-expected mortgage approvals and lending data for May, however these numbers pre-date the sharp rise in yields this month, and there is a sense that is probably as good as it gets when it comes to lending, and that its downhill from here.

The big jump in yields in the US has also translated into a jump in yields more broadly, cementing a 25bps US rate hike in July, which will give some cover to the Bank of England to make a similar move in August.

Commodities

The sharp jump in US yields and the surge in the US dollar has seen gold prices slide below the $1,900 an ounce level and to the lowest levels since mid-March. Given the strength of recent US data it seems likely that gold prices might have further to fall.

While the strength of the US dollar is weighing on gold prices, oil prices have edged higher as the more resilient nature of US data has helped push crude prices higher for the second day in a row.  

Volatility

Sugar prices continued to unwind on Wednesday, testing fresh lows not seen since the start of April and bolstering price action as a result. One day volatility on the US sugar contract printed 65.64% against 45.28% for the month.

Keeping with commodities, corn prices also continued their slide lower. Markets appear to be working on the basis that forecast rainfall in the coming weeks will be sufficient to bolster harvests so if this fails to materialise then expectations would be for something of a reversion. One day vol stood at 51.21% against 36.84% for the month.

In fiat currencies, it was Sterling-Aussie that proved to be the most active trade. That shortfall in Australian inflation data was sufficient to erode support for AUD at least in the short term, pushing the cross out to levels not seen in 18 months. One day vol printed 9.47% against 8.16% for the month.

Elsewhere, price movement appeared to be relatively subdued. For equity indices, it was the SMI that again proved to be the outlier as it gave back a little over half of the opening gains. One day vol sat at 16.04% against 12.23% for the month. And in cryptos, price action is also calming although Bitcoin cash remains one of the most active with daily vol of 119.46% against a one month print of 87.06%.


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