It’s been a mixed start to the week for European markets with the DAX underperforming on the back of the unexpected announcement by OPEC+ that it will cut production output by 1.1m barrels a day from next month, while the FTSE100 has pushed up to within touching distance of the 7,700 level.
Europe
The main beneficiaries of this announcement have been the likes of BP, Shell as well as Harbour Energy as crude oil prices jumped to their highest levels since early March.
The move by OPEC+ is particularly unhelpful for central banks who, while being worried about sticky inflation, are becoming increasingly concerned about pushing rates up from their current levels. These concerns are especially pertinent given recent worries about financial stability, as yields edge back toward their recent peaks.
While the rise in energy prices has helped the energy sector, the rise in yields is also helping to boost the banks, with the likes of Barclays, Standard Chartered, and Lloyds leading the gains here.
Travel and leisure have proved to be a laggard with the sharp rise in energy prices acting as a drag on airlines with Ryanair, Wizz Air, and British Airways owner IAG all slipping back.
The fallout from the collapse of Credit Suisse has continued today with reports circulating in the Swiss press that UBS may have to cut up to 36,000 jobs, as it looks to integrate the bank into its business model and mitigate any doubling up of certain roles. The shares have come under pressure on an unrelated story that the Swiss prosecutor is opening an investigation into the final details of the takeover.
Cineworld’s woes have continued today with the penny shares slipping back after the cinema chain dropped its plans to sell its UK and US businesses after failing to find a buyer.
The company also said it had agreed on a conditional plan to exit bankruptcy, wiping out its existing shareholders, as well as announcing that it is looking to raise £1.8bn in new funding, as well as reducing the overall debt levels to $4.53bn. This move, if approved by the various counterparties, comes across as ambitious in the current environment.
After all, if you can’t find buyers for your US and UK businesses, both of which are potentially decent assets, then it comes as a bit of a stretch for investors to another £1.2bn in new debt to the same management team that brought the business to its knees in the first place. While CEO Mooky Greidinger hailed the deal as a “vote of confidence”, as the business comes out of bankruptcy some might suggest its akin to putting an arsonist in charge of the fire department.
US
It’s been a mixed open for US markets with the Nasdaq 100 opening lower on the back of the move higher in the oil price, and the initial rise in US yields, however, those yield gains soon reversed
A disappointing ISM manufacturing survey saw US 2-year yields slip back below 4% after all key metrics came in below forecasts, with prices paid dropping to 49.2, and employment slipping to 46.9. The headline slipped to 46.3, the lowest since May 2020.
Tesla shares have come under pressure despite the electric car company posting another record quarter for vehicle deliveries. In Q1 the company said it had delivered 422,875 new cars, with the boost to numbers helped by the price cuts the company announced in January.
While noteworthy in terms of another record quarter, the numbers were only modestly higher than Q4’s 405,278, compared to the jump of 40,000 that we saw between Q3 and Q4 of last year, which suggests demand is slowing, despite the price reductions. This is weighing on the rest of the sector with Rivian also lower.
What is likely to be of more interest is Tesla’s Q1 revenue numbers compared to Q4, in addition to how much costs have gone up given the increase in prices of various raw materials. We’ll find out the answer to that question on 20th April.
FX
The US dollar slipped back across the board after a weaker-than-expected ISM manufacturing report for March which saw economic activity fall to its worst levels since May 2020.
The greenback was originally higher in the wake of the weekend announcement by OPEC which drove yields higher, however, the poor economic numbers have seen those yields slide back, as the ebb and flow in US bond markets continues against a backdrop of uncertainty over the future direction of US rates.
Commodity currencies have seen the biggest lift, with the Australian dollar among the best performers today ahead of tomorrow’s rate decision from the RBA. The expectation is that we’ll probably see rates left on hold given the change in the language at the last decision in March, which suggested a more data dependent approach. A fall in headline inflation back to 6.8% in February suggests that the spike up to 8.4% in December may well have been a one-off and may give policymakers confidence that a pause may be appropriate.
Commodities
Crude oil prices spiked sharply higher today after the weekend announcement by OPEC+ to cut over 1m barrels a day from their production output from next month. Interestingly while we saw a sharp spike higher prices retreated sharply from their intraday highs, suggesting that part of the move was driven by a short squeeze. The move by OPEC+ has also prompted a raft of upgrades to various oil price targets toward $100 a barrel. This is certainly a risk however the bigger risk is that it causes demand to slow further exacerbating the challenges facing the global economy over the rest of the year.
Gold has ticked higher on the back of the afternoon weakness in yields as well as a slightly weaker US dollar.
Volatility
It was a notably subdued day when it came to price action on Friday, although commodities appeared to be the outlier in terms of asset classes for outsized price movements. Natural Gas prices rallied on Friday, recovering the week’s losses, but as trade has resumed into the new week, this hasn’t been sustained. One-day volatility printed 82.41% against 76.32% on the month.
Keeping with the asset class and grains were also in focus. The USDA prospective Plantings report which was published ahead of the weekend break served many soft commodities well, triggering what has been described as a round of technical buying. Soybean prices returned to three-week highs, advancing around 2% on the day. One-day volatility sat 23.43% versus 18.32% for the month. That USDA report also lifted Wheat by a similar amount despite a close on 10% increase in planted acres for the crop. Inventories also came in better than predicted, but below year-ago totals. One day vol stood at 40.24% versus 35.15% for the month.
And Stellar Lumens remained the most active crypto asset, trading in a range exceeding 10% on Friday although failing to top those November 2022 highs. One-day volatility printed 73.12% against 61.16% for the month.
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