ISM services reinforce resilience of US economy

The FTSE100 looks on course to finish the week higher, as well as on course to reverse a significant proportion of last week's losses, led primarily by industrials, as well as basic resource stocks, helped in no small part by this week’s better-than-expected economic numbers out of China.

Europe

The FTSE100 has underperformed its European peers today largely due to weakness in the energy sector which is offsetting the gains in basic resources, with BP and Shell sliding back, as natural gas prices slide to new 18-month lows.

The general mood has also been helped by better-than-expected economic reports, which while raising concerns about further rate hikes, have also helped to create a mood that the economic picture may not be as dire as had been predicted at the start of the year.

This mood has helped to boost European markets more generally with improvements in services sector PMI numbers for February, with the DAX also having a strong session, and on course for its highest close in over a year, helped by strong gains from the likes of Volkswagen, after the car company raised its 2023 adjusted operating margin to 7.5% to 8.5%, from 7.36%. 

Today’s best performers have been the likes of Glencore, Antofagasta, and Rio Tinto on the back of this morning’s improvement in Chinese economic numbers, while on the downside today’s weakness has resulted from disappointment over earnings numbers.

Admiral Group is lower on the back of a downgrade by Citi, while Rightmove has slipped back over concerns about its margins as we look ahead to the rest of the year. A slowing housing market has certainly weighed on house builders this week, with Persimmon the worst performer this week after its latest earnings update, pointed to concerns over lower completions.

Digital education company Pearson is also lower despite reporting better-than-expected revenues and profits for its current year. Full-year sales rose 12% to £3.84bn, helping to raise adjusted operating profits by 18% to £456m.

On the outlook, Pearson was more cautious, particularly around revenue in its higher education division which is expected to decline by low-single digits, which may help explain why the shares are lower.

US

US markets picked up where they left off yesterday, opening higher as US 10-year yields fell back below 4%, with the main focus on the ISM services report for February. Today’s ISM report showed little sign that the big rebound in January was a one-off, with the headline number falling slightly to 55.1, from 55.2, with further gains in employment to 54, and new orders rose to 62.4. Prices paid did slow but still remained high at 65.4.

As a leading indicator for next week’s payrolls number for February, it’s a further indication that the US labour market remains resilient.

Despite the decent report, US yields have slipped back from the highs this week, which appears to be helping support today’ s end-of-week gains.   

Concerns over the viability of Silvergate are weighing in crypto companies with the likes of Coinbase, MicroStrategy, Marathon Digital, and Riot Blockchain all sharply lower.

Amazon shares have edged higher on reports that it has paused construction on its second HQ in Virginia. The decision to pause means that the project is unlikely to complete by 2030 as envisaged as it looks to eke out cash flow over a longer period.

Tesla shares are also higher after the latest China shipments data showed a rise of 13% from January. 

FX

The US dollar is also a little bit softer on the back of today’s slide in US 10-year yields back below 4%, with the Japanese yen being one of the main beneficiaries to today’s weakness. The Swiss franc is also higher.

The Australian dollar is gaining on the back of the stronger demand picture coming out of China, helped by the rebound in metals prices, notably copper and iron ore prices.

It’s also been a strong week for the euro as higher terminal rate projections get baked into the currency, although the gains have been relatively modest.

The pound is also ending the week on a slightly more positive note; however, it is finding it difficult to rally given some mixed messaging from Bank of England officials about the likely path of future rate hikes.   

Commodities

Crude oil prices initially dropped sharply from 2-week highs after reports emerged of a rift between Saudi Arabia and the UAE, over whether to produce more oil. It’s being reported that the UAE wants to produce more oil and is said to be debating as to whether they should leave OPEC, due to Saudi ignoring their requests. While the reports were quickly denied, prompting oil prices to rebound, the fact they emerged at all suggests that there is disagreement over quotas which could affect future cap decisions.  

Gold prices have enjoyed a decent rebound this week, despite a sharp rise in yields, with a softer US dollar helping to play a part. This week’s rebound appears to have all the hallmarks of a technical rebound after hitting its lowest levels this year just above $1,800 at the end of last month.

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