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Market update

Slowdown fears increase as US and China inflation slows more than expected

copper mine

After a quiet session for Asia markets, European markets have slipped lower, with declines in basic resources and energy acting as a wider drag on sentiment.

Europe

Today’s weakness in commodity prices, and metals prices more specifically, appears to be being driven by concerns over a slowdown in the Chinese economy after producer prices slipped further into deflationary territory at -3.6%, and CPI hit its weakest level in 2 years.

Glencore, Rio Tinto, Anglo American, Antofagasta are amongst the main decliners, along BP and Shell as oil prices slide back, along with Telecoms which is also under pressure.

Airtel Africa latest full year numbers came up short of expectations on profits, even as revenues came in as forecast. Full year revenues rose to just over $5.25bn, however pre-tax profits fell short due the impact of exchange rate effects coming in at $1.03bn.

Vodafone is also lower despite the formalisation of its strategic relationship with Emirates Telecom and the appointment of its CEO to the UK company’s board as a non-executive director.

Rolls-Royce shares have also come under pressure on disappointment that management appeared reluctant to shift on their current full year guidance. Given the gains seen so far this year, this comes across as disappointing on the part of management. Whether this was down to an overabundance of caution, or uncertainty over the outlook, the improvement in engine flying hours is encouraging, as is the improved pricing on new orders, which in turn will see higher margins, speaks to the former, rather than the latter.     

US

US markets slipped back on the open even as we got further confirmation of slowing inflationary pressure. US PPI for April saw a further slowdown to 2.3% down from 2.7% while core prices also slowed to 3.2%. This has added to the prevailing narrative that pressure on prices is continuing to subside, although weekly jobless claims edged higher to 264k, even as continuing claims slowed to just over 1.8m. 

Disney shares have come under pressure after seeing subscriber numbers fall sharply in Q2, even though revenues came in above expectations at $21.82bn, and an increase of 13% from a year ago. 

On the streaming front Disney+ subscribers saw a drop of 4m to 157.8m, against an expectation of a 2m gain. Despite another quarterly fall in subscribers, quarterly revenue saw an increase of 12% due to higher revenues, which translated into a lower-than-expected operating loss of $200m, for the direct-to-consumer business, and a wider loss of $659m across all platforms.

While the increase in prices at Disney+ appears to have prompted some cancellations, this has been offset by higher subscription revenue on a per user basis, although its Hotstar business has struggled, seeing a decline in ARPS. The Parks business saw revenues increase 17% to $7.8bn helped by the reopening of its Shanghai resort as Covid restrictions there got relaxed.  The company also said it was on course to deliver $5.5bn in costs.

Robinhood Markets is trading higher after reporting Q1 net revenues of $441m, above expectations of $422.8m, although monthly active users came in short at 11.8m. Q1 net losses rose to -$511m, which was slightly better than forecast, with the company also saying that it was launching a new 24-hour trading, 5 days a week, which is due to launch next week. For Q2 consensus expectations are for revenues to improve to $466m and for net losses to narrow to $17.4m.

PacWest Bancorp shares have fallen back after the bank admitted that there had been a deposit outflow of 9.5% last week on reports that the bank was in talks with potential investors.

Peloton shares have also slumped after announcing that it was recalling 2.2m exercise bikes due to concerns about the seat post. 

FX

Despite further weakness in yields, the US dollar appears to be benefitting from the predominantly risk off tone that appears to be driving price moves today, with the Australian dollar seeing the biggest losses on the back of lower metals prices and the weaker than expected Chinese inflation data.

The pound has also underperformed despite the Bank of England raising rates by 25bps and upgrading their GDP forecasts by more than expected. The slightly more upbeat outlook was offset with an admission that inflation was likely to remain higher for a lot longer than expected, with little prospect of rate cuts much before the end of next year.

The admission by some banks that they got their parity calls on the pound wrong may well have seen sterling edge higher this week, however, as is often the case, this admission could well prompt some initial weakness as recent long positions start to take a little profit, as positions get adjusted for the next move.    

Commodities

Despite the weakness in yields gold prices have found themselves under pressure because of the rebound in the US dollar.

Crude oil prices are also in retreat having hit one-week highs earlier in the week, as recent China inflation data pointed to a slowdown in demand in the world’s second biggest economy, while a lower-than-expected US PPI number pointed to a similar trend of a cooling economy. 

Volatility.

Shares in Google’s owner Alphabet spiked higher on Wednesday as the market responded to company announcements from its developer conference. Whilst that wasn’t sufficient to drive meaningful price action in the underlying stock, it did have an impact on CMC’s proprietary basket of gaming companies. Alphabet is one of the heaviest weighted constituents here and as a result contributed to one day vol on the gaming basket coming in at 37.16% against 26.27% for the month.

Bitcoin posted some notable gains on Wednesday around the release of that US CPI data but was equally quick to post a reversal, with the coin trading in a range which comfortably exceeded $1000. As a result, price action on the legacy crypto asset advanced to 62.98% on the day against 43.81% for the month.

The NASDAQ spent yesterday’s session bouncing in and out of negative territory but that news of easing inflationary pressures gave tech stocks a boost, with the index rallying into the close and finishing more than 1% ahead. One day vol on the index printed 20.32% against 16.39% for the month.

And energy prices were in focus after some bigger than expected draws were reported by the EIA, most notably in refined products. RBOB Gasoline advanced to highs not seen since the start of last week, with one day volatility coming in at 34.31% compared with 31.86% on the month.

 


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