European markets stabilise after a choppy week

European markets look set to end a choppy week on the front foot, although they remain well off reversing the losses we saw last week, with miners and defensives prompting a solid rebound from the FTSE100.

Europe

Consumer discretionary has seen a lift today with Tesco gaining ground on the back of a broker upgrade after Barclays modestly raised its price target, giving a lift to the rest of the sector, with Sainsbury’s also higher.

Rolls-Royce is also higher after UBS raised its price target to 350p from 200p, with the bank saying that the share price had the scope to treble if the company can improve its cash flow and profit margins.  

Aston Martin Lagonda shares are getting a lift on the back of a broker upgrade from Jefferies, on optimism that after 3 capital raises the balance sheet has stabilised, and that the growth outlook had improved.

Watches of Switzerland is the biggest faller on the FTSE250 after Rolex bought luxury watch retailer Bucherer in a sign that Rolex could be looking to gain better access to the retail market.

Currently Watches of Switzerland is one of the few retail outlets that allows for Rolex clients to be able to send their watches away for servicing.

It’s also raising questions as to whether Watches could lose market share if Rolex decides to switch to selling directly to clients. This is a valid concern, and while Watches management have said the move by Rolex is a response to the succession challenges at Bucherer and not an indication of a broader retail challenge to its market footprint, the move does have longer term implications were Rolex to go down that route.

For now, these concerns seem slightly overstated given the much bigger store footprint that Watches Group has over Bucherer, which has 4 stores in the UK, and all of them in the London area, and 100 worldwide.  Watches of Switzerland on the other hand has 51 stores in the UK, 24 of them in London.

US

After opening on the highs, and failing to push above their respective 50-day SMA yesterday, both the S&P500 and Nasdaq 100 reversed sharply, closing on the lows of the day yesterday as the Nvidia bounce fizzled out.

Today, we’ve seen US markets open modestly higher as attention turns to Fed chairman Jay Powell’s speech, which didn’t contain anything new, and merely served to reiterate that the Fed was data dependent, and that rates might need to go higher. He touched upon speculation earlier this week that the Fed might discuss a higher inflation target to 3%, by stamping on it hard, saying that they remained committed to their 2% target.

This was never a realistic possibility and it's good that Powell strangled it in its infancy, though by doing so it has served to push 2-year yields slightly higher.  

Later today ECB President Christine Lagarde’s comments will be scrutinised for evidence that the ECB is leaning towards a pause, with next week’s August flash CPI from France, Germany a key signposting mechanism for next month’s rate meeting.

On the earnings front the AI theme has continued after small chip maker Marvell Technology reported a solid set of Q2 results, which saw net revenue decline by 12% to $1.34bn, while profits came in at $0.33c a share. The shares initially popped higher yesterday on the back of Nvidia’s numbers and then went into full reverse closing sharply lower. Today’s numbers along with lacklustre guidance of a modest increase in profit to between 35c and 45c a share for Q3 has seen the shares continue to slide. We’ve also seen further weakness in Nvidia’s share price despite yesterday’s blow out earnings report in a sign that perhaps a lot of the good news was already in the price.

FX

The pound has been the worst performer this week, sinking below the 1.2600 level against the US dollar, only days after hitting an 11-month high against the euro. The disappointing flash PMI numbers earlier this week have seen markets temper their bets of further aggressive rate hikes from the Bank of England in the coming weeks to the point that we could well be close to being done. The Chief economist of the Bank of England has already stated that monetary policy is restrictive, and with rates over 5% above where they were at the end of 2021, maybe now is the time to pause to allow the previous rate hikes to continue to trickle down into the economy.

It’s been a similar story this week for other central banks, especially the ECB where a pause next month could well signal that the central bank is done on the rate hike front, whatever Bundesbank chief Joachim Nagel would claim. Yesterday he said that further hikes were necessary despite this week’s awful economic numbers for August from the German economy. This comes across as almost flagellant and causing harm for harm's sake. The last thing the German economy needs now is higher rates, and he may well struggle to put together a sustainable caucus for such a move next month.  

Commodities

Crude oil prices look set to post their second negative week in succession as concern over the Chinese economy, and weaker economic data this week weigh on the demand outlook. While we’ve seen oil prices hit a 4-week low, the downside for oil prices is likely to be limited given the prospect of further output cuts from OPEC+ if prices drop too far.

Gold prices have slipped back from their highs this week, as we come to the end of a positive week breaking a run of 3 consecutive weekly losses.   

Volatility

Netflix has been providing elevated levels of price action in recent days after upbeat analyst comments mid-week served up a brief boost for the stock. The rally proved short lived however with news that the initial subscriber boost from the clamp down on password sharing appeared to be running out of steam. The underlying is little changed on the week but one day vol advanced to 60.24% against 44.95% on the month.

US Bank stocks remain active, with losses from earlier in the week off some ratings downgrades being recovered. CMC’s proprietary basket covering 19 sector constituents popped higher at the open on Thursday before retreating and ending the day close on flat. One day vol stood at 37.29% against 31.79% on the month.

An exodus from tech stocks saw the NASDAQ index pressured on Thursday, with the underlying losing almost 2% on the day. That move comes despite the bumper earnings from NVIDIA but arguably puts additional scrutiny on the idea that the gains being seen for US equity markets are very concentrated around a small number of stocks. One day vol on the Nasdaq stood at 19.73% against 17.17% for the month.

And yet again it was sugar prices that stood out in commodity markets. That news of exports from India being suspended continues to lend support and the underlying has now completely reversed the losses accumulated earlier in the week. One day vol printed 56.85% against 38.89% for the month.  

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