It’s been another positive week for markets in Europe with the DAX briefly rising to a two-month high before slipping back.
Europe
Despite the slow drip feed of negative headlines of rising gas prices, and the supply chain challenges thrown up by the heatwave in Europe there’s been little appetite to drive stocks lower. The news that the Rhine River had fallen to a critical 40cm depth level which would require it be closed to freight barely registered a response. This is probably because smaller barges can still operate at a lower minimum depth level of 30cm.
The resilience of US markets may be helping here as receding inflation is tempering expectations that the Federal Reserve will be as aggressive as originally supposed when it comes to raising rates.
The FTSE100 also hit a two month high earlier this week as it also closes higher for the fourth week in succession.
Having seen positive numbers from Entain yesterday, Paddy Power owner Flutter Entertainment has posted a similarly positive update, putting a bow on a week of strong gains.
Group revenues in H1 increased by 11% to £3.39bn, although losses came in at £112m, up from an £86m loss a year ago, though this was mainly down to various acquisition related costs.
Customer numbers increased over the period by 14% to 8.7m average monthly players, with the US business driving the main gains with a 49% increase in monthly players. The prospect for growth in the US appears to be outweighing concerns over the potential for weakness in its UK and European business.
Revenues in the US rose by 50% to just over £1bn. On the outlook for H2, the company said that so far there has been no discernible slowdown of a consumer slowdown, and that full year EBITDA is expected to come in line with expectations.
Over the past few days, we’ve seen big falls in the share price of GSK as well as Haleon after GSK was named in a lawsuit, along with Sanofi, over the use of Zantac, a drug that was withdrawn from use in 2019, over concerns it caused cancer. These two have been the worst performers this week on the FTSE100 despite today’s modest rebounds. Zantac was a drug that was used in treating gastric distress, like heartburn or indigestion.
Haleon appears to be being targeted, perhaps unfairly due to having only been recently spun out from GSK. The falls in the share price have today prompted a statement from GSK, where they state that the US FDA and the EMA in Europe concluded there is no evidence of a link with cancer. The statement went on to say that GSK have informed Haleon of notice about potential claims under indemnification provisions of the spin-off, while going on to say that it is not possible to quantify what any potential liability might be.
Insurers have also had a positive week on the back of this week's H1 updates from Aviva, Admiral Group, and Legal & General.
US
US markets have opened higher taking their cues from a positive session in Europe, and a sharp fall in import and export prices in July, underlying that inflation pressures in the US are continuing to ease. The latest University of Michigan inflation survey was a bit of a mixed bag, with confidence improving in August, while 1 year inflation expectations declined to 5%, however 5–10-year expectations edged higher to 3%, from 2.9%.
Electric car maker Rivian’s latest Q2 update proved to be less than impressive, although there were signs of progress. Having built 2,553 vehicles and delivered 1,227 of them in Q1 the company said it expected to produce 4,000 in Q2. The company managed to achieve that, with 4,401 produced with the company delivering 4,467 of them.
Rivian said it remained optimistic of delivering on its 25k target for the whole year, despite the challenges facing production and sourcing raw materials. Forward sales also came in ahead of expectations, at $364m, however the company said production costs were rising, which meant that Q2 losses were higher than expected at $1.71bn. Full year losses are now expected to rise to $5.4bn, and while it still has plenty of cash, the rise in costs is likely to be a problem unless they look at raising prices.
FX
The US dollar has seen a bit of a rebound today at the end of what has been a negative week for the greenback. Declining inflation expectations and weaker than expected inflation, has seen markets reduce the prospects of a more aggressive Federal Reserve when it comes to raising rates. This week’s inflation numbers have shifted the dial on a 75bps rate hike in September, to a less aggressive posture of 50bps.
Rather surprisingly, the main beneficiary of this has been the New Zealand dollar, although that may have more to do with the fact that the RBNZ is due to meet next week and raise rates again by another 50bps to 3%.
The pound has been the worst performer today after the latest Q2 GDP numbers showed the economy contracted by -0.1%, with a -0.6% month on month contraction in June. Industrial and manufacturing production numbers were also disappointing, although they didn’t contract as much as had been predicted, while the May numbers were revised higher.
There’s definitely a feeling of profound negativity around the pound’s prospects right now, which while understandable to a degree isn’t supported by the data. A lot of the reason for the decline in Q2 GDP is down to the lifting of covid restrictions in health and social work, which reduced services activities by 0.4%. This appears to be reflected in the government spending numbers which declined -2.9%, while business investment rose more than expected by 3.8%. Without that, the UK economy would have probably avoided a contraction, but you won’t hear anyone mention that as it doesn’t make good copy.
Commodities
Brent crude oil prices have seen a modest rebound this week after the large losses of last week, as falling inflation pressures ease concerns about an economic slowdown weighing on demand. While this week’s US inflation numbers have offered some welcome relief to concerns about demand destruction they haven’t entirely gone away. As Mary Daly of the San Francisco Fed pointed out, the Fed is data dependent, not data point dependent.
A slowdown in price rises does not equate to a trend, especially as we head into autumn and winter when demand for energy tends to pick up. This appears to be reflected in the wildly different outlooks for oil demand for this year, with OPEC cutting its forecast for oil demand this year, while the IEA raised their outlook. Ultimately neither of them appears to have any idea what will happen, which is pretty much par for the course these days and helps explain why oil prices are currently lower on the day.
Another week of gains for gold prices has put it within touching distance of $1,800 an ounce which suggests that the US dollar bull run may well have come to an end. It's also interesting to note that gold prices have risen alongside equity markets, which suggests there is little to no correlation between investor appetite for risk and gold prices.
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