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Market update

Hawkish ECB pushes the euro above 1.0900, weighs on European markets

European Central Bank

For all the optimism that helped to drive the early week gains for markets in Europe, and the record highs for the DAX, today’s Chinese economic data for May has punctured some of that, prompting a little bit of profit-taking after retail sales and industrial production came in below expectations.

Europe

China retail sales showed a gain of 12.7% from a year ago which when you consider various parts of the economy were under covid restrictions was disappointing and was down from 18.4% in April. Industrial production was also underwhelming, rising by 3.5% and reinforcing the idea that Chinese business and consumers are less than confident about the economic outlook, while youth unemployment hit a record high of 20.8%.

A hawkish rate hike from the ECB may also be helping to curb gains on the European benchmarks with the euro pushing back above 1.0900 for the first time in over a month.

The FTSE100 is managing to hold up reasonably well despite weakness in basic resources and financials, with gains in health care, energy and consumer staples helping to offset that.

It’s been a good day for the retail sector with a couple of positive trading updates, from ASOS and H&M.

ASOS shares have seen some decent gains today after reporting an 11% decline in Q3 sales of £859m, which was higher than consensus expectations. The company also reported that it had managed to return to profit during the quarter, and said it was on course to deliver adjusted EBIT guidance of between £40m and £60m for the year.

H&M shares are also higher despite reporting flat sales growth for Q2 with the company citing unfavourable weather conditions, compared to last year. On a more optimistic not the Swedish retailer noted that early trading in Q3 had seen a strong start.

On the downside health and safety tech firm Halma shares are lower after reporting full year results that came in below expectations. Despite reporting a 21% rise in revenues, statutory profit before tax fell 4% to £291.5m. This was largely due to last year’s profits getting a £34m boost from a disposal which flattered the numbers. Today’s decline seems somewhat overdone even accounting for some concerns over margins which were caused by supply chain difficulties. 

US

After finishing the day mixed yesterday US markets opened lower in subdued trade after a mixed set of economic numbers, which showed that while the US consumer remained resilient, weekly jobless claims remained at their highest levels since late 2021, while import and export prices showed further weakness.

The jury remains out on whether the Fed will be able to restart rising rates when they next meet in July. Based on today’s data there are pockets of weakness in some of the economic numbers, and notably around inflation, however consumer spending continues to hold up well.

Tesla shares opened sharply lower, as the bull run of the last 13 days came to an end yesterday, begging the question of whether we might have seen a short-term peak.

On the earnings front Ohio based retailer Kroger announced that Q1 sales came in slightly below expectations at $45.2bn, even as profits rose to $1.51c a share. The company said that growth was fading due to “more customers feeling the effects of inflation and economic uncertainty” with the shares sharply lower in early trading.

FX

The euro has moved to its highest levels in over a month, after the ECB raised rates by 25bps, which was in line with expectations, however in pushing up their core inflation forecasts by quite a sizeable amount they signalled that they are prepared to do much more when it comes to further rate rises. The upgrade to core inflation from 4.6% to 5.1% was chunky compared to a 0.1% adjustment to headline inflation from 2.9% to 3%.

Today’s action is also significant in the context that core CPI is only marginally higher at 5.3%, having fall from 5.6% in May, which rather undermines the messaging as not being particularly realistic. Does anyone at the ECB seriously believe that core prices won’t be lower than 5% from where they are now by the end of this year, when producer price inflation is already slowing sharply. If they do the need to have another look at their economic models. Nonetheless ECB President Christine Lagarde indicated that another hike would be following in July.

It's been a mixed day for the US dollar after US retail sales for May came in better than expected at 0.2%, while weekly jobless claims remained unchanged at 262k and their highest levels since October 2021. In further signs that price pressures are slowing, import and export prices for May showed further signs of weakness declining sharply on a monthly and a year-on-year basis, with US 2-year yields below the levels they closed at on Tuesday.   

The Japanese yen has continued to weaken against the US dollar ahead of tomorrow’s Bank of Japan policy decision. The reluctance of new governor Kazuo Ueda thus far to deviate from the Kuroda policy settings appears to have caught a lot of traders off guard, with last night’s hawkish Fed decision adding to the downward pressure on the yen. With core inflation in Japan currently at 4.1% and the Japanese currency closing in again on multi year lows there is a risk that this policy of benign neglect could backfire horribly in the coming months. 

Commodities

Crude oil prices have edged higher after slipping back yesterday, although the gains have been tempered by disappointment over this morning’s Chinese economic numbers, while at the same time finding an element of support in the fact that we are close to the recent 2-month lows.

Having hit three-month lows yesterday, on the back of the Federal Reserve’s hawkish pause, gold prices have recovered a touch but still look a little soft, with a similarly hawkish outlook from the ECB helping to keep a lid on gains.      

Volatility.    

Shares in Vodafone saw elevated levels of price action on Wednesday following the company’s announcement that had finalised the merger with CK Hutchinson, owners of the Three network. By a narrow margin, Vodafone will be the main partner here, but the resulting gains have barely made an impression on the stock’s recent run lower. The underlying added almost three percent with one day vol coming in at 89.66% against 51.36% for the month.

CMC’s proprietary basket of stocks covering the driverless cars sector found itself in focus, although the underlying story here was one of further meaningful gains for NVIDIA and Intel, rather than anything more nuanced. One day vol on the basket printed 44.57% against 30.37% for the month.

Yesterday’s hotly anticipated FOMC statement did see rates being left on hold but still came with a hawkish tone. The overall reception from equities was positive but some downside pressures were certainly in play following the news. One day vol on the NASDAQ came in at 22.14% against 15.46% for the month, with other US equity indices also showing elevated levels of action.

And AUD/USD fell back from four-month highs in the wake of that FOMC statement. Although this could be seen as underlining the expectation that this will just be a temporary pause in policy tightening, downside pressures have been abating overnight, spurred by more upbeat economic data out of Australia. One day vol on the pair stood at 15.5% against 9.84% for the month.

 


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