It’s been a disappointing start to the week for European markets as investors continue to absorb last Friday’s US payrolls, along with comments from Fed chair Jay Powell which reiterated the hawkish message from last Wednesday’s Fed press conference.
Europe
Upside momentum was also tempered by a hotter than expected ISM services report out of the US which could make the Federal Reserve even more cautious when it comes to a rate cut, after prices paid jumped to its highest level in 11 months.
The mood in Europe hasn’t been helped by further evidence of weak demand in the services sector, with softer PMI numbers from Germany and France, while German import and export numbers for December slowed sharply indicating that Europe’s largest economy is probably in recession.
Fresh from turning down another bid for its Italian business last week, today Vodafone announced that it is still in “discussions” about the future of the struggling operation as it announced Q3 numbers that saw revenues decline by 2.3% to €11.37bn.
The German business was the best performer with revenues of €3.34bn, slightly below forecasts, while the UK business saw total revenues of €1.74bn, which equated to a 5.2% increase in organic services revenue. The Italy business, along with the business in Spain saw declines in organic service revenue while the Vodacom business in Africa saw organic services revenue rise by 8.8%.
With the sale of the Spanish business due to go ahead in the coming weeks, shareholders will be hoping that the Italian business goes the same way, and sooner rather than later. The procrastination here needs to end – management need to either sell the business or make it work better.
The possibility that UK rate cuts might get pushed back appears to be weighing on house builders, led by the likes of Persimmon and Barratt Developments, while we are also seeing weakness in the likes of Howden Joinery and B&Q owner Kingfisher, after JPMorgan cut its price target on the B&Q owner.
US
After the big end of week surge seen in the wake of Friday’s jobs report, US markets opened lower as the continued sell-off in US treasuries prompts a little bit of profit taking after 4 weeks of gains for US stocks.
The weakness in US markets gained further traction after the latest ISM services survey showed economic activity rose to 53.4 in January, while prices paid jumped sharply to 64 raising the prospect that rate cuts get delayed further as inflation starts to show signs of picking up again.
Nvidia shares are higher after being on the receiving end of a price upgrade from Goldman Sachs with the bank expressing optimism that it will beat expectations ahead of the release of its Q4 numbers later this month.
McDonalds shares are higher after Q4 revenues came in short of expectations at $6.41bn, due to an underperformance in international markets. Profits on the other hand were slightly better at $2.95 a share.
Palantir shares are higher ahead of the release of their Q4 and full year numbers after the bell later today. The company which is heavily reliant on US government contracts has been making strides in reducing that dependency to below 50%, but needs to do more to improve profitability and diversify its revenue streams. It has also been developing its AI solutions with further upside possible if the company gets included in the S&P500 after CEO Alex Karp said the company is now eligible to join the main US blue-chip index.
The woes have continued for Boeing today after the aircraft maker warned that it would have to perform more remedial work on more than 50 undelivered Boeing 737 MAX aircraft after the discovery of more mis-drilled holes on some of its fuselages. Boeing said the problem was identified by its supplier Spirit AeroSystems and that remedial work is likely to take several days.
FX
The US dollar has continued to push higher in the wake of Fed chair Jay Powell's interview with CBS over the weekend where he reiterated his comments about the remote prospect of a March rate cut from the Federal Reserve, and that the central bank expects to cut rates 3-times this year.
With the greenback pushing up to its highest levels in over 2-months, we’ve seen yields continue their Friday advance with the US 2-year yield pushing back to its January peaks. This bullishness was reinforced by Minneapolis Fed President Kashkari who pushed back on the idea of rushing into rate cuts, due to uncertainty about where the neutral rate actually is. This caution would appear to be justified judging by the big jump we saw in today’s services ISM prices paid which rose to their highest levels in 11 months.
The pound is amongst one of the worst performers against the US dollar, slipping to 6-week lows despite January services PMI rising to its highest level since January 2022, suggesting the UK economy may be performing slightly better than some of the underlying numbers suggest. The resilience of the numbers has prompted UK gilt yields to edge higher along with US yields as traders push back the timing of possible UK rate cuts.
The euro has also slipped back with a combination of poor French and German services PMIs along with some very poor German import and export numbers has reinforced expectations that the ECB may well have to cut rates before the Fed and the BOE.
Commodities
Further US air strikes on Houthi targets in Yemen have done little to stop crude oil slipping back from the highs of last week, with Brent prices sliding to their biggest weekly decline since September last year. The strength of the US dollar also weighing on prices which slipped to their lowest levels since mid-January.
The rebound in yields along with the sharp rise in the US dollar that we’ve seen in the past couple of days has seen gold prices slide sharply to one-week lows, as US rate cut bets get pushed further out into 2024.
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