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Subdued start to the week as markets eye US CPI and central banks

Even the return of some modest M&A hasn’t been enough to rescue European markets from a soft start to the week, as investors focus on tomorrow’s US CPI numbers and this week’s Fed meeting on Wednesday.

Europe

Asia markets set the tone, falling sharply on the back of rising Covid cases in China, and the growing realisation that any reopening is likely to be very much a stop start affair, as Chinese authorities belatedly come to the conclusion that their zero-covid policy is unsustainable.

On the M&A front US based biotech giant Amgen has won the race to acquire Dublin based Horizon Therapeutics for $28.3bn, beating off interest from the likes of Sanofi and Johnson & Johnson in the process.

We’ve also seen London Stock Exchange shares rebound modestly from one-month lows after it was reported that Microsoft is taking a 4% stake in the business, with a view to launching a strategic 10-year partnership with a view to improving the data platform and other technology infrastructure. The share price response is somewhat underwhelming, perhaps due to the initial low levels of investment involved, and the long lead times involved in making the Refinitiv data architecture more resilient. Nonetheless, on a longer-term horizon the deal can only be good for LSE in terms of building the scale required in order to better compete in the data marketplace, and compete with the likes of Bloomberg, which remains the market leader.  

The collaboration is expected to involve costs of around £300m between 2023 and 2025, with a view to spending up to £2.3bn over the next 10 years and would involve the use of Microsoft’s cloud architecture in rolling out new resilient and improved data services.

As for the rest of the market the tone has been very much risk averse, with basic resources and financials leading the way lower, on the back of weaker growth prospects, which in turn is weighing on bond yields.

US

US markets have opened modestly higher, paring back some of Friday’s late sell-off with investors broadly side-lined ahead of tomorrow’s CPI report and Wednesday’s Fed meeting.

The slight pullback in US yields is helping to underpin a slightly firmer tone in early trade.

Amgen shares have slipped back a touch after announcing it was paying $28bn for Horizon Therapeutics in a deal that saw it ease out the likes of Sanofi and Johnson & Johnson. The initial underperformance in the Amgen share price suggests a concern that they might be overpaying for Horizon.

Rivian shares have slumped sharply after pulling out of its joint venture with Mercedes-Benz to build an electric van in Europe. This is a huge blow to the company’s aspirations of growing its global footprint, especially given the fanfare that surrounded the initial announcement three months ago. The decision to pull out of the deal suggests uncertainty about its ability to deliver on its aspirations, coming as it does against a backdrop of product recalls and supply chain issues.  

FX

The US dollar has been somewhat mixed today ahead of this week’s key CPI announcement and Fed decision. The Australian dollar is amongst the weakest performers on the back of concerns over a more subdued rebound in Chinese economic activity, and weakness in copper prices.

Today's UK GDP numbers proved to be somewhat of a mixed bag for the pound as the UK economy saw a modest rebound in economic activity in October after the sharp declines seen in September. October GDP rebounded by 0.5%, boosted by a rebound in construction and manufacturing output, as well as an improvement in services which saw some of the lost output from September, recouped in October.  Nonetheless the numbers still point to an economy that is struggling in the face of rising prices, and real terms cuts to disposable incomes.

Commodities

Crude oil prices have edged modestly higher after hitting new lows for the year at the end of last week. Prices have been on a slow but choppy slide in the past few weeks as concerns about a weak economic recovery, and or a recession in 2023 has undermined demand expectations.

Gold prices have continued to struggle anywhere close to the $1,800 an ounce level, and are on the back foot today despite weaker yields as the metal treads water ahead of tomorrow’s US CPI and Wednesday’s Fed rate decision.

Volatility

Higher than expected wholesale price data from the US on Friday served to rattle equities heading into the weekend break. This plays towards fears that a more hawkish stance will be seen from the Fed at this week’s FOMC meeting and the S&P’s sell-off in the last hour of trade was particularly notable. That was sufficient to leave it as the most volatile equity index on the day, printing 21.04% against 20.56% for the month.

With markets spooked by the prospect of Fed rate hikes running for longer, that was sufficient to take a toll on oil prices, too. West Texas Intermediate headed towards $70 late on Friday and although downside here proved short lived, it was sufficient to lift one day volatility to 49.26% compared with 46.9% for the month.

Fiat currencies looked somewhat becalmed, but there was a spike of activity in the crypto space, with EOS the stand out. This appears to have been driven by support for ecosystem evolution, lifting the coin around 7% higher. There were concerns however that the gains may prove difficult to sustain and looking at the performance early on Monday, that appears to have played out. Friday’s one day vol on EOS/USD came in at 117.45% against 75.7% for the month.

Moonpig may have seen some support off the back of bargain hunting after it downgraded expectations in the middle of last week, but by Friday any confidence here appeared to have evaporated once more Shares closed the week almost back at Wednesday’s lows, with daily volatility coming in at 136.08% against 115.47% for the month.


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