China support chatter and blow-out US payrolls gives Europe and end of week lift

Europe

European markets have had a much better tone today on reports that China is looking at new support measures for its property market, which are giving a lift to basic resources, and helping to lift commodity prices, along with the FTSE100.

The weak China recovery story has acted as a drag on the wider mining and commodity sector thus far year to date with the likes of Anglo American, Rio Tinto and Antofagasta all down heavily.

Today’s reports of a possible stimulus plan have prompted a strong rebound for the whole sector, and those same miners, while other China exposed companies are also seeing a lift, with Prudential and Standard Chartered also higher.  

JD Sports is also gaining a decent tailwind on the back of last night’s positive reaction to sector peer in the US, Lululemon, and its strong start to its fiscal year, and upgraded guidance.

On the downside BT Group and Vodafone could be slipping on reports that Amazon is in talks to offer a mobile phone service to its US Prime customers in a move that if successful could see them try and offer a similar service in Europe.    

In M&A News private equity group EQT has finally agreed a deal to buy the UK veterinary drugmaker Dechra Pharmaceutical’s for the price of £4.46bn or 3,875p per share. In its recent trading update Dechra issued a warning that operating profits would be below expectations of £186m for the current financial year. Today’s deal puts the final bid price close to the recent record highs back in April when a deal was first touted.  

US

US markets opened strongly higher after the latest payrolls report showed 339k jobs were added in May, beating forecasts for the 14^th month in a row, but also giving the Federal Reserve a rather sticky problem as to whether to stick or twist when it comes to another rate hike on the 14^th June.

On the balance of probabilities, it keeps another hike on the table, however it also means that we could start to see some dissent, with some on the FOMC pushing for some caution given some of the weakness seen this week from some of the earnings announcements from lower and mid-tier retailers.   

Having hit record highs earlier this week Broadcom announced Q2 numbers that came in line with expectations. Q2 revenues rose almost 8% to $8.73bn, while profits came in at $10.32c a share. The recent move higher was driven by the announcement of the company’s multibillion dollar deal with Apple, as well as its position as a possible beneficiary of the increased focus on AI. It still has to complete the deal with VMWare which is currently facing regulatory scrutiny. For Q3 the company expects to see revenues of $8.85bn, while market consensus on profits is expected to match the numbers for Q2, helping to lift the shares higher on the day.

Dell Technologies shares opened higher after reporting better than expected sales for Q1, helped by stronger than expected demand from businesses for computers, particularly servers, as revenue came in at $20.9bn, while profits came in better than expected at $1.31c a share. A slightly weaker outlook appears to be weighing after Q2 guidance was lower than expected at $20.2bn and $21.2bn, although its recently announced collaboration with Nvidia to facilitate AI chips on its servers could reap dividends.

Lululemon shares have seen a decent move higher after reporting a decent set of Q1 numbers and raising its full year guidance. Q1 revenues came in at $2bn, a rise of 24%, while margins also improved by 360bps compared to a year ago. Profits also saw a sizeable improvement, coming in at $2.28c a share. For the outlook Lululemon said they expected Q2 revenue to rise 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. Nike and Foot Locker shares are also higher.

Apple shares are back within touching distance of its record highs last year ahead of next week’s WWDC, where it is expected to announce some new hardware upgrades, along with a potential virtual reality headset.

FX

Having hit a 2-month high earlier this week, the US dollar has seen a sharp reversal in the last couple of days and looks set to finish the week lower, even with today’s blowout jobs report for May which saw 339k jobs added and a 93k 2-month upward adjustment.

Speculation has been growing in the last week or so that we could see a pause in the rate hiking cycle when the Fed next meets in less than 2 weeks. There does appear to be a growing caucus on the FOMC for a wait and see approach with a view to a hike in July if the data supports such a move, however today’s move does muddy the waters somewhat as to whether waiting might be wise.

On a slightly strange note, we also saw the unemployment rate rise by 0.3% to 3.7%, which rather goes against the grain when it comes to looking at the headline numbers. Wages remained resilient at 4.3%.

Despite today’s strong jobs report the Australian dollar has outperformed, helped by the headlines out of China which has supported the rally in the mining sector, and commodity prices. We also have the small matter of an RBA rate meeting next week which could be prompting some short covering in the event the Australian central bank drops another surprise rate hike in the manner it did last month.   

Commodities

Crude oil prices have continued their move up from this week’s 4-week low ahead of this weekend’s OPEC+ meeting, with the outside risk that oil ministers could surprise the markets with another production cut, given the recent weakness seen in prices.

Today’s modest rebound on the back of this morning’s China headlines and US payrolls numbers would suggest that a surprise cut announcement is now less likely, however one also can’t ignore that on the whole this week’s data has been on the weaker side of the ledger.    

Volatility

Hong Kong’s Hang Seng index had a turbulent day on Thursday, with early gains being reversed through the physical trading session, before rallying higher once again in afterhours trade. A number of regional investors are seen as being optimistic that further economic stimulus measures will be deployed by Beijing so this, combined with the expectation of some robust US payroll data later in the session drove one day vol to 32.55% against 25.31% on the month.

The iconic, London-listed footwear company Dr Martens saw its stock tumble on Thursday despite hitting £1 billion in revenues for the first time. Profits were squeezed partly as a result of logistical issues in the US, leaving the underlying to sell off by almost 12%. One day volatility stood at 152.05% against 67.45% for the month.

The Australian dollar proved to be the most active fiat currency trade on Thursday with the pair continuing to pull back from that test of seven-month lows seen earlier in the week. The key driver here is noted as being the increased prospect of the RBA hiking rates this month whilst the Fed could play the waiting game. One day vol printed 11.06% against 9.89% on the month.

Oil prices remained in focus with crude making meaningful gains in the latter part of yesterday’s session. There’s an OPEC+ meeting scheduled for the weekend so despite news of a meaningful build in US oil stocks from the EIA, with prices having been depressed of late, some response from big producer nations could be seen. One day vol on Brent Crude stood at 39% against 33.51% for the month.