With the clock continuing to tick down towards the US debt ceiling deadline of 1st June, and US policymakers no nearer to a deal, European markets are finding little inclination to move higher, with the DAX and CAC40 sliding back for the second day in a row.
Europe
The luxury sector is leading the weakness in Europe, the recent outperformance coming to a sudden end with big falls for the likes of LVMH, Hermes and Burberry who are all sharply lower, after Deutsche Bank cited elevated valuations in the sector.
We’re also seeing selling pressure in broader retail, after the latest Kantar survey showed that food price inflation rose by 17.2% in May, only down modestly lower from 17.3% in April. This could be bad news for general retail as it means less disposable income for summer spend in the short term, with weakness in the likes of Frasers Group, JD Sports, Next and B&M European Retail.
The FTSE100 is outperforming with gains in commercial real estate, and energy, helped by a higher oil price after the Saudi oil minister warned about being too bearish on prices, however basic resources are also acting as a drag on a weaker outlook narrative.
BT Groupshares have barely budged after Altice raised its stake in the business to 24.5%, and again reiterated that it had no intention of making an offer for the business. This rather begs the question as to what benefit Altice hope to derive from such a large stake, a seat, or seats on the board, or perhaps other significant influence on the direction of the business.
US
With debt ceiling discussions ongoing, and time running out for an agreement, US markets are starting to roll back, with the outlook for interest rates and a slowing economy, also starting to gain traction, with a stronger US dollar and higher yields starting to act as a drag on risk.
Having dropped to levels last seen in January 2020, at the beginning of this month, the Zoom share price appears to have found a bit of a base. With the pandemic premium now all gone investors can now focus on a business that is magnitudes of size bigger compared to 3 years ago, however even with a decent beat on revenues and profits, and an upgrade to guidance the shares have been clobbered today.
When Zoom reported at the end of last year Q1 guidance was set at between $1.08bn and $1.085bn, a figure which it comfortably beat with $1.11bn, in last night’s trading update, while profits came in at $1.16c also well above guidance.
For Q2 the company says it expected to repeat its Q1 performance on revenue and expects to see profits of $1.05c a share. It also raised its full-year revenue guidance from between $4.44bn and $4.46bn to between $4.47bn and $4.49bn. This is all very positive, yet the shares have been slapped hard, perhaps on the basis that investors were looking for more.
Apple shares have slipped back after announcing a multibillion-dollar chip deal with Broadcom, sending the chipmaker’s shares to new record highs.
Dick’s Sporting Goods shares have edged higher after the retailer upgraded its full year outlook.
PacWest shares are higher again building on the 20% gains seen yesterday from the sale of $2.6bn in real estate loans.
FX
The pound is softer after the latest UK public sector borrowing numbers for April surged to £25.6bn, the second highest April number ever, with debt interest payments contributing £9.8bn to the total. The government also spent £3.9bn on various energy support schemes, while spending an extra £4.5bn on net social benefits, pushing that total to £25.4bn for the month. Tax receipts in April fell to £69.7bn, down from £72.4bn a year ago.
On a more positive note, the IMF announced that it was upgrading its forecasts for the UK, saying it no longer expected the economy to be in recession, the third time this year they have been forced to change their outlook. The IMF said they now expected the UK economy to grow 0.4% this year, and that it would no longer be the worst performing G7 economy this year.
While helpful from a political standpoint that the IMF has changed its outlook, with the government touting the more optimistic tone, the reality is that this latest change merely serves to outline how utterly abject these economic organisations have been in trying to forecast inflation, GDP as well as interest rates rises. The pound may also be sliding on the back of tomorrow’s inflation numbers and the expectation of a sharp fall in headline CPI, although there is a chance that higher food prices may well limit the extent of the decline.
The US dollar is once again on the rise again, with higher yields on the US 2-year yield serving to underpin the greenback, pushing it back towards its recent highs against the euro, below 1.0800.
Crude oil prices have taken a leg to the upside after the Saudi Arabian oil minister warned about betting on continued falls in oil prices. With OPEC+ due to meet in early June, and the market still smarting from the surprise production cut announced in April, there is a risk of another surprise cut in output. There has been no indication that OPEC+ is thinking along those lines yet, however there wasn’t in April, so it pays to be cautious, especially when the US is a buyer on any dips.
Gold prices are down for the third day in a row, pressured by a stronger US dollar and higher yields as markets continue to price in the prospect of higher rates for longer.
Volatility
Pfizer’s stock leapt higher mid-session on Monday off the back of positive drug trial news. The company has been developing a weight loss therapy and tests here have yielded similar results to a market leading brand. The underlying closed more than 5% higher, with one day volatility coming in at 76.4%, just over double the one month reading of 32.43%.
The US dollar continued its uptrend against the Yen on Monday, offering some indication that there’s confidence building when it comes to American lawmakers managing to avert a debt ceiling crisis. The pair has tested fresh highs for the year to date, with one day volatility coming in at 9.56% against 9.32% for the month.
Crypto currencies were relatively subdued, but Tron was a notable stand out here. There are no apparent fundamental drivers involved although the asset has been broadly outperforming of late. One day vol printed 50.39% against 27.67% for the month.
In terms of commodities, the Soybean contract was in focus, having tested 18-month lows on Monday. Prices are off by around a quarter since last May’s highs but bargain hunters swooped in, lending some meaningful support as a result. One day vol sat at 28.68% against 20.82% on the month.
And in terms of equity indices, tech stocks gave the Hang Seng a boost on Monday morning, with the Hong Kong index making a strong start to the week, adding around 2% in early trade. One day vol was recorded at 28.07% against 24.22% for the month.
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