European markets slip back after strong start to the year

Europe

European markets have spent most of the day on the back foot with some profit taking kicking in after what has been a strong start to the year.

This week’s US CPI report is set to become the latest waypoint in the tug of war currently playing out between the market, which thinks the Fed will have to cut rates this year, and Fed officials who insist nothing even close to that will happen. 

Online electrical retailer AO World initially saw its shares rise sharply to a 6-month high, after upgrading its full year EBITDA guidance to between £30m and £40m, however the pop didn’t last long, with the shares slipping back. Management cited progress on reducing costs during Q3 with revenues still set to show a fall of 17.2% from last year, in line with previous guidance.

This inability to hang onto those gains appears to have permeated into the rest of the retail sector, with Next and Frasers Group giving up some of their early year gains.

BT Group is also lower having also seen a solid start to the year, with 5 successive days of gains, after its price target was downgraded by Jefferies

Games Workshop Group shares have fallen back after reporting an increase in H1 total revenue to £226.6m, from £211.6m a year ago, however profits before tax fell to £83.6m. One notable standout was a sharp decline in licensing revenue. At the end of last year, the shares received a boost after signing a deal with Amazon to create a TV and/or film franchise for its Warhammer games.

US

US markets edged slightly higher on the open pulling off their pre markets lows, despite the hawkish comments from the Presidents of the San Francisco and Atlanta Federal Reserve, which poured cold water on the expectation that the Federal Reserve might look to sharply slow the pace of its rate increases.

There had been an expectation that today’s comments from Fed chairman Jay Powell in Stockholm might contain a hawkish narrative, however he confined himself to talking about climate change, and the Fed’s reluctance to become involved in policy around that, rather than the investment climate. This lack of comment on monetary policy matters has helped lift markets in early trade thus shifting the narrative to the CPI numbers which are due to drop on Thursday.

Apple’s decision to replace chips made by Broadcom saw the shares of the chipmaker slide in late US trade. Apple also said it was looking to reduce its reliance on Qualcomm products as well as it looks to bring all its component production in house starting in 2024/25.

TSMC shares are also set to be in focus after the Taiwan chipmaker recorded a miss on its latest quarterly revenues. Despite this Q4 revenue still saw a 43% increase to $20.6bn, which is still quite a decent number, however with global demand slowing, future forecasts will probably need to be more realistic. The slowdown in iPhone and Mac sales during the quarter is likely to have impacted demand given some of the disruption seen in its China markets due to lockdown restrictions.

As part of its recent decision to cut the number of roles by 18k, Amazon announced that it would closing 3 fulfilment centres in the UK, in Doncaster, Hemel Hempstead and at Gourock in Scotland, although it is planning to open centres in other locations over the next two years.   

Virgin Orbit shares have fallen sharply after last night’s failure to launch several satellites into orbit after an unknown anomaly caused the mission to fail.  

FX

It’s been a rather mixed day for the US dollar with the euro edging back up towards its recent highs, as expectations around future ECB rate hikes in the next few months get talked up. The economic outlook is also looking slightly more positive given the milder weather, which has prompted some upgrading of economic forecasts for this year. The next key resistance lies near the 1.0780 area and May 2022 highs, which it needs to overcome to target a move towards 1.1000.

The slightly softer tone for risk is weighing heavily on the likes of the Australian dollar, and the pound which are both slightly weaker.     

Commodities

Crude oil prices have continued to edge higher, although they are below the highs we saw yesterday, as concerns over demand keep traders cautious. The sharp declines last week were predicated on worries over the ability of the Chinese economy to rebound during Q1. This afternoon’s assessment of the global economy by the World Bank has done little to help sentiment as it became the latest economic organisation to warn over the outlook for the global economy, saying it was on a razors edge. 

Gold prices have remained close to 8-month highs with the recent dip in yields continuing to support demand for the yellow metal. The next key level remains at $1,896 which is a 61.8% Fibonacci retracement of the down move from last year’s record highs to last year’s lows at $1,615. 

Volatility

Copper prices made further gains on Monday, breaking above the $400 mark for the first time in more than six months. Again, it’s the reopening of China that is seen as driving price action here, whilst some market participants are now eyeing significant supply shortfalls, too. One day vol on copper v US Dollar advanced to 24.4%, up from 23.19% on the month.

Sticking with commodities and Natural Gas is once again in focus, although the bargain hunting that had been underway now appears to have stalled. Yesterday’s move above the $4 mark proved to be short lived, with the return of warmer than seasonal weather seen as a key driver here. One day vol printed 93.1% against 88.08% for the month.

Stake building by an activist investor in pharmaceuticals giant Bayer saw its underlying share price add more than 5% in yesterday’s trade. That had a consequent impact on volatility, with a one day reading of 87.46% being recorded against a monthly print of 34.37%.

And over in cryptocurrencies, there are once again pockets of activity being seen. The legacy bitcoin may be looking somewhat anodyne, but Cardano started the week with a move higher of more than 15% following significant reported inflows before giving back a fair proportion of that upside. That takes gains since the start of the year to more than 30%, leaving one day volatility to come in at 129.24% against 50.19% for the month.