After yesterday’s tepid start to the week, European markets look set to finish a positive month on a weak note after another record high in EU CPI which saw prices rise more than expected in May to 8.1%. This, combined with further upside pressure in oil prices has served as a dead weight on European markets today, with the FTSE100 outperforming.
Europe
Hawkish comments from Fed governor Christopher Waller yesterday, also weighed on sentiment, pushing US yields sharply higher, putting him at odds with Atlanta Fed President Raphael Bostic who suggested it might be worth looking at a pause in hiking rates in September.
Waller’s comments that he wanted to see 50bps rate hikes for several meetings, raises the prospect, that in the event of similar views, the Fed Funds rate could well be much higher than the 2.5% consensus by year end if the Fed is so minded.
While European markets have slipped back, the FTSE100 has been helped by the rise in the oil price moving above $120 a barrel, which is acting as a tailwind for BP and Shell.
Unilever shares have also rallied sharply after it was announced that Nelson Peltz has been appointed a non-executive director, and member of the Compensation Committee. Peltz recently acquired a 1.5% stake in Unilever through his Trian fund saying he wanted to work collaboratively with management to help turn the business around.
Peltz has pedigree here, given his role in turning around Procter and Gamble in 2018 with the hope he can sprinkle some of that magic on Unilever, where the share price has underperformed significantly over the past 2 years.
BT Group shares are also higher after announcing it had signed a partnership deal with Ericsson to provide commercial 5G private networks for the UK market. The deal opens the potential for both in accessing a market that is likely to be worth billions of pounds by the end of the decade.
Bottom of the FTSE100 is B&M European Retail after releasing their full year results, falling to their lowest levels since June 2020, as full year revenues fell 2.7% to £4.67bn, down from £4.8bn, although on a two-year basis revenues are much higher, rising by 22.5%. Profits before tax were unchanged at £525m, while the dividend was lower at 16.5p, however this was on top of the special dividend paid in January of £250m.
On current trading the picture looks troubling with like for like sales for the first 8 weeks of 2023, showing a 13.2% decline in sales. Management went on to warn that trading patterns were likely to remain unpredictable, which could see consumers prioritising spending away from higher margin products which is likely to see a dilution in margins more broadly. EBITDA margin is expected to fall by between 70-130bps, although it would still be higher than pre-pandemic levels.
On a more positive note, B&M announced who will be succeeding outgoing CEO Simon Arora. Arora will be replaced by Alex Russo who is the current CFO and has held senior roles at Asda and Tesco.
Today’s inflation data, along with today’s increase in oil prices is weighing on consumer discretionary shares once again, with the likes of travel and leisure coming under pressure, with easyJet, IAG, and Wizz Air all down heavily. TUI is also lower as the company cancels a slew of flights from Manchester Airport during the month of June.
The latest mortgage data also pointed to a slowdown in April, perhaps not too surprising given the rising cost of living, along with rising borrowing costs. This appears to be acting as a drag on house builders today with the likes of Persimmon, Barratt Developments and Taylor Wimpey underperforming.
In M&A news GSK announced that it is set to pay $2.1bn to acquire Affinivax, a vaccines company based on Boston Massachusetts, with another $1.2bn to be paid in line with development milestones.
US
If US markets had been open yesterday, they would have probably finished higher, however Fed Governor Christopher Waller’s comments about rate rises, along with higher-than-expected inflation readings in Europe has seen markets in the US open lower today, as US yields push higher.
Today’s losses are being led by the Nasdaq 100, which looks set to close lower for the second month in a row, albeit well off the lows. The S&P500 is similarly lower on the day, although after the rebound seen last week, it does have a chance of reversing its monthly losses.
AMC Entertainment has seen some decent gains for the second day in a row, after holiday weekend receipts for Top Gun: Maverick came in well above expectations.
We’re also seeing some decent gains in the likes of Coinbase, MicroStrategy and Riot Blockchain as US markets play catchup to the rebound in bitcoin, above $30k and the rest of the crypto space since last Friday.
On the earnings front we have the latest Q2 numbers from HP. A surge in PC sales over the past couple of years pushed the HP share to a record high back in April, after it was revealed that Warren Buffett had taken a $4.2bn stake in the business. HP has been looking to acquire new businesses after agreeing to buy audio and video accessories maker Poly for $1.7bn. At its Q1 trading update HP recorded net sales of $17bn, with most of that coming from sales of personal systems, which includes laptops and PCs, amounting to $12.2bn. Printing sales were slightly disappointing, falling by 23%.
HP also said it was pulling out of Russia although it did offer an optimistic outlook upgrading its full year guidance to $4.28c a share. For today’s Q2 numbers expectations are for profits to come in between $1.02c and $1.08c a share. That continues to be the market consensus which currently sits at $1.05c a share, however continued supply chain disruptions and rising costs present a clear threat to the company meeting these expectations.
FX
The US dollar has rebounded from yesterday’s 5-week lows, helped by the comments from Fed governor Christopher Waller that he wants to go down the route of several 50bps rate hikes. We appear to be seeing clear divergences in where monetary policy is likely to go, starting to open up between Fed policymakers.
The euro has also slipped back despite the latest set of inflation numbers showing another record high in May of 8.1%, putting the ECB in the unenviable position of coming under increasing pressure of having to hike at a much faster rate than it would like. You can almost hear the wailing and gnashing of teeth amongst German savers as the real terms value of their savings moves to -9% on an annualised basis. The inflation number is likely to increase calls for a 50bps move in July, presenting ECB President Christine Lagarde with a messaging challenge when the ECB meets next week.
The pound is also weaker, though that has more to do with a weaker US dollar than anything else, although the recent lending data showed that mortgage lending was slowing against a backdrop of rising rates. Credit card spending also increased suggesting that consumers were taking on more debt to cover the rising cost of living.
Commodities
Brent crude oil prices have continued to move higher after EU leaders agreed to a 90% ban on Russian oil by the end of the year, pushing above $124 a barrel and the highest levels since 9th March. The ban would start with seaborne supplies of crude and petroleum products, however scratch below the headlines and the technical details of what’s been agreed still have to be fleshed out. Hungary gained an exception with respect to its supplies which come through the Southern Druzhba pipeline which transits through Ukraine.
The stronger US dollar and higher yields are contriving to push gold prices slightly lower on the day.
Volatility
It was something of a quiet start to the week with assorted markets being impacted either by holidays – most notably Memorial Day in the US - or the prospect of a shortened trading week. However, looking further afield, exaggerated price action was seen from Australia’s A2 Milk Company, following read-across from a peer that it had signed a deal to begin exports of baby formula to the US. There’s a shortage of infant milk in the US right now and the FDA is having to look for solutions. A2’s share price added 10%, driving daily vol to 225% against a one month print of 84% as a result.
Whilst volatility was broadly subdued across the tradable universe, one instrument which exhibited some modestly higher levels of movement was CMC’s proprietary Hong Kong Large Cap RRG Momentum index. This highlights stocks showing a positive relative strength versus the overall index and has been trending higher for the few weeks as optimism builds over China’s reopening from COVID lockdowns. Daly vol here printed 39.81%, although that was admittedly a shade below the monthly print of 42.38%.
The German Tech 30 was the only index to print daily vol above the monthly print, with sentiment undeterred by that rampant inflation print. Daily vol here reached 34.81%, up from 34.11% on the month.
Finally, fiat currencies looked somewhat subdued, as did cryptos with the exception of Stellar Lumens, posting daily vol of 127% against 119% on the month and overnight gains could well see that pace sustained in the short term.
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