Europe

With the weekend approaching and the events of the last few days very much front of mind, European equity markets have slipped back at the end of a week that has seen stock markets prove to be remarkably resilient, despite surging oil prices and concern over a possible Israeli incursion into Gaza.

Nonetheless, while stock markets haven’t lost much ground this week, investors appear to be adopting a safety-first approach ahead of the weekend over concerns we could see the current ongoing build-up of tensions flare up into an escalation that involves Hezbollah or Iran, if Israel follows through on its threat to enter Gaza.

With that in mind the energy sector is helping to limit the downside on the FTSE100 with BP and Shell leading the gainers, while a sharp rise in the gold price has helped to push gold miners Endeavour Mining and Fresnillo higher as well.

On the downside, wealth manager St. James Place is the worst performer on reports that the regulator is pressuring it to change its fee model in order to comply with new consumer duty regulations that came into force earlier this year. There are concerns that any changes might impact its current business model in a negative way.

We’re also seeing weakness in the rest of the sector with Ashmore lower after revealing further fund outflows, as some investors de-risk their portfolios. We’re also seeing weakness in the likes of Abrdn, Man Group and Hargreaves Lansdown all underperforming.     

US

US markets initially looked set to take their cues from today’s weakness in European markets by opening lower, as concerns over further escalation in the Middle East kept investors cautious. Today’s better than expected bank earnings numbers have changed that pulling futures off their lows and prompting a positive open.

Some of those early gains have been tempered after preliminary University of Michigan sentiment numbers fell in October, and 1 year inflation expectations surged to 3.8% from 3.2%   

The first half of this year has seen JPMorgan set itself apart from the rest of the US banking sector, reporting record revenues in the first two quarters. The collapse of Silicon Valley Bank and Signature Bank saw JPMorgan win over $50bn of new deposits from SVB as it took over the banks deposit base. The turmoil in rates markets has proved to be a boon as revenues surged in both Q1 and Q2. Q2 saw record revenues of $42.04bn, blowing through expectations of $39.34bn, and profits of $4.75c a share, or $14.5bn, an increase of 67% a year ago. The bank also raised its guidance for full year net interest income to $87bn, as the gap between loans and deposit margins blew out further.

Today’s Q3 numbers have seen the bank upgrade this NII guidance further to $89bn, after posting revenues of $40.69bn, a solid beat as well as profits of $4.33c a share, or $13.2bn. On the underlying business itself, investment banking and FICC both outperformed, while equities came up short, while the addition of SVB added $1.5bn to NII.

The bank also set aside $1.38bn in respect of credit losses which was a lower number than expected.

While JPMorgan posted a strong set of numbers, so did Wells Fargo which is a key bellwether of the US economy as well as loan demand from US consumers, given its position as one of the US biggest mortgage lenders.

When the bank reported in Q2 the numbers showed that overall lending was starting to slow as higher rates started to bite into US consumer spending. In a sign that lending was starting to slow, total average loans came in below expectations at $945.9bn, while provision for credit losses came in at $1.71bn, a big increase from last year’s $580m. For Q3 this was expected to rise to $1.35bn but came in lower at $1.2bn. Q3 revenues came in at $20.86bn which was higher than expected, while profits were also better than expected at $1.48c a share. The improvement came because of higher rates with net interest income rising to $13.11bn. Loan demand does appear to be slowing with Wells Fargo saying that the bank was seeing the impact of a slowing economy with loan balances declining. Total average loans came in short of forecasts at $943.2bn.  

Citigroup on the other hand has been out on its own given its own problems with respect to higher costs as well as another restructuring plan, with 5,000 positions already shed this year CEO Jane Fraser is struggling to turn around a bank that doesn’t appear to be doing anything particularly well. In Q2. Operating expenses were higher by 9% in Q2 rising to $13.57bn, with credit losses rising to $1.5bn, a 77% rise on Q2 last year. Today’s Q3 numbers have seen revenues come in $900m above expectations at $20.14bn, and profits of $1.63c a share, although some areas of the business continued to struggle. The equities division, like JPMorgan’s came up short with $918m in revenues, however FICC sales and trading outperformed with $3.56bn. Also notable was lower than expected operating expenses of $13.51bn, a rise of 6% which was a lower increase than Q2. There was a small cloud with the bank saying they expected to see increases in credit losses in Q4. Full year revenue guidance was kept unchanged at between $78bn and $79bn, however Citigroup did revise its forecast for full year NII to $47.5bn from $46bn.

Also in the news is Microsoft after the UK’s CMA removed the final obstacle to its acquisition of Activision with the deal now likely to go ahead.  

FX

The US dollar is coming to the end of what has been another broadly positive week, reversing the modest declines of last week, as investors pile back into the greenback on the back of the horrific events in the Middle East.

It is giving back some of those gains today with the Norwegian Krone and Canadian dollar benefitting from the ramp in oil prices today and gas prices this week. Amongst the biggest losers this week have been the euro and the pound on concern over the effects surging energy prices are likely to have on the slowdowns being experienced in current economic data.

Commodities

Crude oil prices have move to one-week highs over concerns that events in the Middle East could spiral out of control after Iran warned Israel of the consequences of a ground invasion, raising concerns that we might see disruptions in the Straits of Hormuz. With the weekend fast approaching there is a concern that a flare-up could see prices flash higher.

Another sharp drop in yields as well as increase in geopolitical tension has seen gold prices surge through $1,900 an ounce towards 3-week highs and a possible test of the September peaks at $1,950 an ounce.

Bond yields have fallen sharply this week largely on the premise that we may well have seen the last of US rate hikes, helping to put in a floor under the recent decline in the gold price. That may be true, but one can’t help feeling that is only part of this week’s story, with haven demand also driving this week’s gains, as concerns rise that the crisis in the Middle East may spiral out of control.

Volatility

Yesterday’s stronger than expected US inflation reading did nothing to bolster sentiment, especially when it came to consumer discretionary spending. The risk is that the Fed’s idea of just one more hike may no longer be sufficient and that’s going to see certain cohorts of retailers struggling to make sales as we go into the peak shopping season. CMC’s proprietary basket of outdoor living stocks – including the likes of Lululemon and Harley Davidson – unwound the gains seen at the start of the week and returned close to fresh lows for the year. One day vol on the basket stood at 54.59% against 28.96% for the month.

The US inflation print also unsettled wider US equity markets, with the smaller cap Russell 2000 seeing more elevated levels of price action. The underlying lost close on 3% at one point before recovering some of the downside, but one day vol printed 19.82% against 17.73% for the month.

Yesterday saw the release of the latest WASDE agricultural report, which included the lowering of a number of production estimates for grains such as wheat and corn. Prices tracked higher as a result, with Corn finding itself as the most active. One day vol printed 36.38% against 22.81% for the month, whilst Wheat was also in focus with a one day reading of 49.43% compared with 37.03% for the month.

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