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OECD economic downgrades sends stocks lower

OECD

It’s been another day of weakness for markets in Europe after the OECD followed up yesterday’s World Bank global growth downgrade, with one of its own. The OECD said the global economy would pay a heavy price for Russia’s invasion of Ukraine, with much weaker growth and higher prices, which is likely to result in permanently higher inflation, and a weaker recovery.

Europe

This really shouldn’t have come as too much of a surprise, however markets in general tend to view the world through a rather rose-tinted prism, which is largely detached from the experiences of ordinary people on the ground.

To have the risks to the global economy, particularly in Europe as well as the UK, spelt out so starkly, seems to have prompted increased anxiety amongst investors sending yields higher, and equity markets lower.

Melrose Industries is one of the best performers after outlining its ambitions for the year ahead of its Capital Markets day. The company raised its operating margin target for the GKN aerospace business to 14%, while predicting an expected annual revenue growth target of over 10% to 2025, and then 7% to 2030.

Melrose also announced that it would, because of the sale of Ergotron for $650m, they would be looking to buy back £500m of their own shares starting tomorrow. 

The more positive outlook for its aerospace division appears to be giving an uplift to Rolls-Royce, whose own aerospace division has suffered because of the pandemic.

Aveva Group is also enjoying a decent rebound after initially sliding back in the wake of its full year results, with the company posting a pre-tax loss £18.6m primarily due the impact of higher costs and the withdrawal from Russia and Ukraine which acted as a headwind this year. Nonetheless the underlying business looks solid, with annualised recurring revenue up by 10.2%, while overall revenue rose 44.5% to £1.19bn. This appears to have reassured investors with the shares recovering strongly after Panmure Gordon said the shares were too cheap. 

Zara owner Inditex is helping to give the retail sector a lift after yesterday’s Target inspired declines, reporting Q1 sales that were better than expected. Q1 sales came in at €6.74bn, a rise of 36% and well above expectations, while net profits came in at €760m. The retailer did have to make a provision of €216m in respect of Russia and Ukraine exposure, which impacted on profits but the ability to pass on price increases without affecting sales offers optimism about the wider outlook.

 Inditex also said it expected gross margins to remain stable through the year at around 60%. The upbeat trading update has given the likes of JD Sports and Next a welcome boost.

The last 12 months has seen real estate company Workspace Group go on a bit of an acquisition spree, even as it recovers from the effects of the pandemic on its occupancy rates and rental income At the end of H1 the London flexible office space provider said trading profit was up 42.5% year on year, helped by a 12.3% increase in net rental income. Today’s full year numbers have seen the company post profit before tax of £124m, while net rental income rose 6.4% to £86.7m, as occupancy rates recover to 84.3% from 77.8%. The company raised its dividend to 21.5p per share. On the outlook Workspace said it expects to see a significant boost to rental income because of the acquisitions of McKay and Busworks.

Credit Suisse shares spent most of today under pressure after the Swiss bank reported that it was likely to make a loss in Q2, with management blaming challenging market conditions. These intraday losses reversed in the afternoon session on unsubstantiated reports that the bank could be subject to a potential bid from US bank State Street.

US

US markets opened lower, slipping back after two days of gains, with the return of US 10-year yields above 3%, weighing on sentiment, against a bleak economic outlook painted by the OECD on the prospects for the global economy.

Roku shares rose sharply on the open on chatter that Netflix might be looking at making a bid. The closure of the share trading portal for Roku employees has prompted speculation that something might be afoot. With the share prices of the major streaming platforms under considerable pressure the sector is ripe for consolidation, especially with the deeper pockets of the likes of Amazon and Disney in a much better position financially.

Novavax shares have popped higher after an FDA advisory panel recommended vaccine approval of its Covid-19 jab.

The rise in the oil price has helped to push Exxon Mobil’s share price to a new record high just shy of $105.

FX

The US dollar has continued to look well supported with the Japanese yen continuing to slip across the board, as it continues to close in on the 135.00 area and the 2002 highs. The weakness of the yen is in sharp contrast to the rest of the G7 with the Bank of Japan setting itself apart as the only central bank that isn’t looking to tighten monetary policy in the short or medium term. 

The pound has also slipped back towards the lower end of its recent range after the OECD followed the World Bank in downgrading its outlook for the UK economy. The OECD pointed to elevated inflation levels, high tax rates and a shortage of workers as key challenges for the UK. 

The euro is trying to regain some of its recent lost ground ahead of tomorrow’s ECB rate meeting, with the moves likely being driven by position adjustment as traders gear up for a possible policy pivot which is likely to take effect from the July meeting, but which will probably be flagged up tomorrow.      

Commodities

There are few signs of a respite for crude oil prices with Brent edging back towards the highs of last week when we briefly hit $125 a barrel. The continued rise in oil prices is a challenge to the peak inflation narrative that is currently helping to act as a drag on US 10-year yields. While OPEC has pledged to increase production to offset the effect of missing Russian output, it may not be enough given that some producers are already struggling to hit their current targets. The UAE oil minister appeared to confirm that there was further upside to come when he said that prices are nowhere their peak due to the current lack of Chinese demand.        

Volatility

Price action remains somewhat limited, but commodities do appear to be offering some trading opportunities right now. Notably, sugar contracts jumped higher after the weekend break, with prices here evidently being driven by read across from gasoline, on the basis that more sugar will be used to produce ethanol, in turn limiting supplies of the raw product. Daily vol on white sugar printed 52.61% against 32.04% on the month.

Further easing of COVID restrictions in China saw the country’s stocks find favour on Monday, with the tech sector seeing broad-based gains. This resulted in exaggerated levels of price action for CMC’s China Tech basket of shares, with daily vol coming in at 229% against 139% on the month.

Cryptos still remain somewhat subdued on the daily versus monthly metrics following that shake out a few weeks ago, but Chainlink is proving to be something of an outlier here. The underlying added as much as 10% in Monday’s trade, driving daily vol to 225% against a one month print of 146%. Across other asset classes, vol remains in short supply.

 


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