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US payrolls surge, sending yields higher

This week’s market price action has been very much a function of higher yields exerting downward pressure on stock markets on both sides of the Atlantic, with the rise in long term yields starting to tighten financial and credit conditions across Europe and the US.

Europe

Today’s bumper US payrolls report has prompted a choppy session pulling European markets off their highs of the day, as we look to close out a third week of declines on a positive note.

The DAX has struggled this week, slipping to a 6-month low a couple of days ago, while the FTSE250 fell to an 11-month low. The FTSE100 has performed slightly better managing to hold above its September lows, but the pressure being exerted by the prospect of higher long-term rates is certainly taking its toll on appetite for stocks.     

Aviva is the best performer on the back of speculation that the life insurer could be the subject of a takeover approach according to some press reports. These reports have claimed that Allianz in Germany and a couple of other parties might be mulling a £6 a share offer. The rest of the sector is also getting a lift on the back of this speculation, with Legal & General also edging higher.

GSK is in the news after selling another tranche of its stake in Haleon, raising £886m in the process and reducing its stake in the business to 7.4%.

Ahead of its Q3 numbers early next month, Shell said that trading conditions had improved in Q3 with respect to its gas business, even as its other businesses of chemicals and oil and gas byproducts traded in line with their performance during Q2. With the sharp rise in oil prices seen since June you would expect to see a significant improvement in oil margins over the quarter, however there was little mention of that in today’s production update.

Today’s preliminary full year results from pub chain JD Wetherspoon has seen the company post a big rise in like for like sales of 12.7%, with full year revenue rising 10.6% coming in at £1.93bn, ahead of expectations. We’ve also seen a return to profit, after 3 years of losses, as pre-tax profits came in above forecasts coming in at £42.6m. In achieving this Wetherspoon cut back the number of pubs to 2011 levels, with 826 pubs. This is well below the 2015 peak of 951, and down from last year’s 852.

US

US markets opened sharply lower after the latest US payrolls report showed the US economy added a staggering 336k jobs in September, while August was revised up to 227k, pushing long-term yields sharply higher, with the US-10 year and 30-year yield hitting new 16-year highs.

Wage growth was slightly softer than expected at 4.2%, however the pressure on yields is continuing to act as a drag on elevated US valuations and keeping the prospect of a November rate hike a very real possibility.

Another notable factoid was a big jump in part-time positions which rose 151k and could also explain why wage growth showed little sign of racing higher, and which appears to be limiting the downside, with the S&P500 holding above its 4,200-support area, and 200-day SMA. The downside may also be being limited by the fact that it’s a US holiday on Monday, and that we are still on course to decline for the 5th week in a row.

Tesla shares have come under pressure after the electric car company announced a raft of new price cuts on both Model 3 and Y vehicles after Q3 deliveries came up short of forecasts earlier this week.

Exxon Mobil is in focus after saying it is in talks to acquire shale oil producer Pioneer for $60bn. Pioneer has operations in the Permian basin of Texas and New Mexico and is Exxon’s main competitor in that region.

Microsoft said it expects to complete the Activision deal next week subject to final approval from the UK regulator the Competition and Markets Authority.

Levi Strauss shares have slipped back after the leisurewear maker once again cut its full revenue growth forecast. Having cut the top end to 2.5% in Q2, we’ve seen that come down further to between 0% and 1% over continued concern about weakness in the final quarter of the year. Q3 revenues came in slightly below forecasts at $1.51bn with Europe and its North American markets underperforming. On the plus side sales in Asia were positive, driven by a rebound in China.

FX

Earlier this week we saw the US dollar hit a 10-month high on expectations that another rate rise is coming in November due to ongoing resilience in the labour market. Today’s payrolls report appears to reinforce that expectation after seeing the US economy add another 336k jobs, along with upward revisions to August and July, putting it on course for a record-breaking 12th successive weekly gain.   

The worst performers this week have been the commodity currencies of the Norwegian krone, Australian and Canadian dollar on the back of weakness in oil and copper prices.  

With the US dollar gaining for the 12th week in a row, the euro has seen a similar record decline of 12-weeks, with a number of ECB speakers adopting some reasonably neutral comment about the prospect of further rate increases.   

Commodities

Crude oil prices have whipped around after today’s positive payrolls report painted an improved picture of the US labour market, but they are still on course for their worst weekly decline since March, after the big drop seen earlier this week.

Gold prices also came under further pressure, sliding to another 7-month low in the wake of today’s payrolls number, and sharp jump in yields, although we are once again off the lows of the day.   

Volatility

Coca Cola proved itself to be one of the most active stocks on Thursday off the back of a curious announcement from Walmart. The retail giant noted that the impact of weight loss drugs like Ozempic was impacting consumer demand, especially for higher calorie pre-packed food and beverages. Walmart is seen as having a good degree of protection here as they gain revenues from the sale of the drugs in the first place, but Coca Cola fell almost 5% to new lows for the year. One day vol stood at 40.74% against 21.77% for the month.

Wall Street see-sawed through yesterday’s session, with mainstream indices rejecting early losses and finishing the day broadly unchanged. There’s some optimism creeping in ahead of today’s payrolls report that is seen as having the potential to set the tone for where the Fed will take monetary policy next. A hotter than expected print here will therefore stand to unsettle sentiment. One day vol on the Russell 2000 small cap index printed 21.15% on the day and 16.1% on the month.

The sell off continued for oil on Thursday amidst concerns of over supply despite those thin inventory readings we’ve seen of late plus news that OPEC+ was to maintain production cuts. West Texas Intermediate is trading at levels not seen in around six weeks with one day vol standing at 43.7% against 27.51% on the month. It’s a similar story for Brent Crude with one day vol of 40.07% against 24.81% for the month.

And the Aussie Dollar against the Greenback continues its recovery from tests of lows not seen since last October as those US treasury yields fall back. Again the NFPs today have the scope to direct sentiment here, but one day vol on the pair stood at 10.69% against 9.77% for the month.


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