Subdued end to a negative month for Europe’s markets

It’s been a subdued end to what has been a negative month for European markets, with the FTSE 100 once again finding a base just above the 7,210 level, the third time this year the UK blue-chip has bounced off this key level.

Europe

Among the biggest fallers today Glencore is lower as it goes ex-dividend, along with Endeavour Mining, Antofagasta and IHG.

Diageo is lower after its French peer Pernod Ricard warned that sales in the US would decline in Q1 as the economy slows towards the end of the year and consumers pare back their consumption after a strong start to the year. 

In Europe, UBS is the biggest story after reporting a $29bn profit because of its deal with Credit Suisse. The profit however isn’t a real one but an accounting measure that reflects the difference between the price it paid for Credit Suisse’s assets, and the actual value of them. Strip that number out and UBS generated profits of $1.7bn on revenues of $9.54bn.

US

US markets opened higher and on course for their fifth successive daily gain after the latest US PCE inflation numbers came in as expected, and weekly jobless claims slowed to 228k from 232k the previous week. US PCE core deflator edged higher to 3.3%, which was as expected wile personal spending for July rose by 0.8%, even as personal income slowed to 0.2% from 0.3% in June.

Salesforce shares are edging back to the highs seen in July after comfortably beating expectations on both Q2 revenues and profits. The decision to raise prices in July looks to be starting to pay off with Q2 revenues coming in at $8.6bn, well above forecasts of $8.53bn, while profits came in at $2.12c a share. Unlike when they beat expectations in Q1, this time Salesforce has updated its full year revenue and profits guidance. Full year revenue is now expected to come in between $34.7bn and $34.8bn from $34.5bn, with the profit forecast upgraded to between $8.04 and $8.06 a share, with margins rising to 30% from 28%. Q3 revenues are forecast at $8.71bn with profits forecast to come in around $2.05c a share.

We’ve seen another profit warnings from a US retailer with Dollar General after the discount retailer downgraded its full year profits forecast by as much as 30% to between $7.20 and $$8.30 from $10.03. The retailer blamed a poor set of Q2 numbers which saw same-store sales decline -0.1% due to increased rates of theft or shrink as they euphemistically like to call it. Operating profit declined 24.2% in Q2 to $692.3m, while net income fell 30.9% to $469m.  

Having hit record lows earlier this week cinema chain AMC Entertainment shares have received a lift on reports that Taylor Swift’s ERAS tour will be shown on AMC Screens from the 13 October

After the bell Broadcom is the latest chip company to publish its Q3 results, with the shares hitting record highs in July on optimism that it would benefit from its exposure to AI. For Q3 the company expects to see revenues of $8.85bn, while market consensus on profits is expected to match the numbers for Q2 at $10.50c a share. It still needs to complete the deal with VMWare which is currently facing regulatory scrutiny, and which has now been approved by the UK’s CMA.

We’ll also be hearing from US retailer Lululemon and their Q2 numbers, with the hope that there will be a similar market reaction to the one we saw in Q1, when the company raised its guidance for Q2 to between $2.14bn and $2.17bn and for annual revenues to increase to $9.47bn, with annual profits expected to rise to between $11.74 and $11.94 a share.

FX

The euro has slipped back after some mixed economic numbers from across the bloc. In Germany, retail sales for July slipped -0.8%, and unemployment rose to its highest level since May 2021, while the various inflation numbers from France, Italy and the main EU CPI number painted a mixed inflation picture for the bloc. While French inflation jumped sharply to 5.7% in August, in Italy we slowed to 5.5% from 6.3%, while on the headline EU inflation number we remained steady at 5.3%, while core prices slowed to 5 3% as well.

With unemployment starting to show signs of increasing across the bloc, markets are starting to price an increased probability of a pause in the ECB’s rate hiking cycle when the governing council next meets on 14 September. 

The pound has also slipped back even as Bank of England Chief economist Huw Pill painted a picture of higher rates for longer in a speech in South Africa earlier today. His metaphor that he preferred to see a rate profile along the lines of a “Table Mountain” approach, was used to illustrate this point. The contents of the speech appeared to suggest that while inflation levels remained elevated, there was an acknowledgement that a lot of the recent rate hikes hadn’t yet been felt, raising the risk of overtightening, and that monetary policy was already sufficiently restrictive. This would appear to suggest that a consensus is growing that the Bank of England could be close to the end of its rate hiking cycle, with perhaps one more at most set to be delivered in September.

There also appears to be an increasing debate over the 2% inflation target as being too low given current levels of inflation, with arguments being made for increasing it to 3% or 4%. The 2% target has been a key anchor of central bank monetary policy over the last 30-40 years, and while it has served a useful purpose in anchoring inflation expectations some are arguing that trying to return it to 2% could do more harm than good.

That may well be true, but there is also the argument that in moving the goalposts on the current inflation target now it sends the message that central banks are going soft in getting inflation under control, and that rather than return it to target over a longer period, it’s easier to move the goalposts. The time to have moved the inflation target was when inflation was below or at 2%, not while its miles above it. Optics is everything and while inflation is well above target central banks need to send the message that inflation remains their number one priority, and not water down their long-term commitment to it because its too hard. The time to discuss a change of a target is when that target has been met and not before. Once that happens the discussion on an inflation target, or an inflation window of 1.5% to 3.5% can begin.

Commodities

Another big decline in US inventories yesterday of 10.6m barrels has seen oil prices continue to push higher today, up to two-week highs, with the gains being helped by talk that OPEC+ members could well extend their recent production cuts into October. Gasoline demand has also remained resilient; however, this could slow after US Labour Day next week as US driving season winds down and a lot of the National Parks in the North of the country start to shut down for the winter season.

Gold prices have seen a decent rebound in the last couple of weeks as yields have drifted lower, however they still look set to finish the month lower, despite a growing expectation that we could be close to the end of the central bank rate hiking cycle.

Volatility

Earnings news from HP after the bell on Tuesday rattled sentiment in the stock as management dialled back profit expectations as it battled against a slow market for new PC sales. Gains seen on the underlying earlier in the week were completely eroded, with the stock falling by close on 10% after the release. One day vol stood at 57.73% versus 35.21% on the month.

Cannabis stocks were lit up on Wednesday after news that the US was considering easing restrictions on marijuana, provided a long overdue lift for the sector. CMC’s proprietary basket of licensed cannabis growers added close on 10% during the session, with one day volatility standing at 173.76% against 96.39% on the month.

In commodities, sugar prices remain in focus although after some solid gains off the back of supply concerns drove the contract to a two-month high, at least a degree of profit taking now appears to be in play. One day vol stood at 53.41% against 41.07% for the month.

And a downward revision in US GDP data on Wednesday proved sufficient to serve up some more weakness for the greenback. Losses against the yen bounced off one-week lows and were short lived, but this underlines the fact that the market remains wary of the downside risk here. One day vol on USD/JPY sat at 9.19% against 7.64% for the month, with NZD/USD seeing even more pronounced activity at 12.83% on the day and 10.97% on the month. 

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