European markets rebound after turbulent week

Europe

As we come into a long weekend in the US and the UK, European markets appear to be getting an end of week lift, after what has been a negative week for stocks in general.

Today’s more positive mood appears to be being driven by some optimism that we might see the framework of a debt ceiling deal starting to unfold, with more details expected to emerge over the weekend, as we zero in on next week’s 1^st June deadline.

The FTSE100 has seen a modest recovery from levels last seen on the 29^th March, with the main gainers being in basic resources, on the back of a rebound in commodity prices.

AstraZeneca is also helping drive the UK index higher after announcing positive results from its Lynparza and Imfinzi drugs in a Duo-E phase 3 trial for treatment of advanced endometrial cancer.

The sectors that have been hit the hardest this week have been those that are likely to be the most susceptible to a recession or at the very least stagflation, with weakness in house builders, as well as general retailers. These are still underperforming today, even though the FTSE100 is seeing a modest rebound.

The sharp rise in gilt yields seen in the past week or so is weighing on Persimmon, Taylor Wimpey and Barratt Developments, as consumers face the prospect of higher mortgage costs when it comes to refinancing, while general retailers are getting hit over concerns over lower sales volumes with Frasers Group, JD Sports, B&Q owner Kingfisher and Next all under pressure.  

US

US markets are higher today with the Nasdaq100 leading the way again, after the latest core PCE inflation data ticked modestly higher in April to 4.7%. On a more positive note, personal spending rebounded strongly to 0.8% from 0.1%, in a sign that while inflation remains stubbornly persistent the US consumer remains remarkably resilient.

Consequently, today’s numbers keep the prospect of another 25bps rate hike by the Federal Reserve very much on the table for their June meeting.

The tech rally that we saw yesterday still looks resilient with Marvell Technology seeing strong gains after stating that it expects revenue to soar on the back of the boom in AI. Nvidia shares, which managed to post gains of 25% yesterday, appear to be taking a breather, however with the shares already up 160% year to date this could merely be a pause as they get used to the new altitude as we head into the weekend.   

Gap shares have gapped higher after reporting a surprise profit of $0.01c a share in Q1, helped by a significant reduction in costs. Sales fell by 3% across all the retailers’ main brands including Banana Republic and Old Navy. Net sales came in at $3.28bn, a decline of 6%, although the company was able to reduce the level of inventory by 27% from the same period last year, while gross margin came in ahead of expectations at 37.1%

FX

Today’s stronger than expected core PCE inflation number has seen the US dollar rebound off its lows of the day, but it remains strongly higher on the week as markets become more certain that the Fed will hike again in June. Of course, there is another payrolls and CPI report between now and then so there is still scope for a pause. As for the prospect of rate cuts, these are continuing to get priced out for this year, and well into 2024.

The worst performer this week has been the New Zealand dollar after this week’s surprise hike and hold guidance from the RBNZ. We’ve also seen weakness in commodity currencies, on the back of concerns over slower global growth and the slide in copper prices, which hit 7-month lows earlier this week.

The pound has had a mixed week, down against the US dollar but has managed to hold its own against almost everything else, as traders’ price in the prospect of several more rate rises from the Bank of England, Chancellor of the Exchequer Jeremy Hunt indicated that a recession would be a price worth paying if it brings inflation down. If rates stay at current levels, then he may well get his wish. However, while many economists are pricing in the prospect of much higher rates, the likelihood is that we won’t get anywhere near 5.5%, if the Fed stops hiking sometime in the next couple of months. PPI is already much lower at between 4% and 5% and where PPI goes CPI tends to follow. It could be that inflation starts to fall on its own, it may just take a little bit longer, due to the Bank of England being slow out of the traps over 12 months ago.

The latest retail sales numbers for April were better than expected, however it was notable that we saw downward revisions to previous months numbers, which would indicate that demand is likely to remain weak for some time to come, especially given some of the increase to the cost of living seen in April and May in the form of council tax bills, and other utility bills, apart from energy bills which should start to come down over the summer.    

Commodities

Crude oil prices are edging higher again, and look set to post their second successive weekly gain, as it continues to climb away from the lows posted at the very start of this month. We did see a sharp fall yesterday on comments that OPEC+ wasn’t likely to cut production next month, however the risk of further sharp falls is being mitigated somewhat by the fact that the markets know the US government is a buyer below $70 as it looks to refill the SPR by the end of the summer.

Despite today’s firmer yields, gold prices are managing to hold up reasonably well today, although it should also be mentioned that we are coming off 2-month lows, as rising yields erode the attraction of the yellow metal.  

Volatility

NVIDIA stock found itself in focus on Wednesday night following earnings which reflected the benefits to the company of the AI revolution. Shares recorded a 25% advance on Thursday, pushing the market cap close to one trillion dollars and delivering some read across to other tech stocks, too. One day vol stood at 104.86%, up from 55.09% on the month.

NVIDIA is the largest constituent in CMC’s Automation and Robotics basket, so no surprise that this cohort gapped higher at the open then saw further solid gains during Thursday’s session. AMD and Cadence Design also posted double digit percentage gains, driving one day vol on the basket to 44.59% against 27.68% for the month.

That frenzy around the tech sector unsurprisingly drove interest in the NASDAQ which once again proved to be the most active equity index for the session. One day vol came in at 20.19% against 15.67% for the month.