European markets slip back, as US dollar tries to find a base

Europe

It’s been another lacklustre and negative session for European markets, with investors keeping their gaze very much fixed on next week’s central bank meetings from the Federal Reserve, as well as the European Central Bank. Having seen decent gains over the last few weeks there appears to be little appetite to drive markets much higher in the short term, with modest profit taking helping to keep a lid on things.

It’s been a solid H1 for Ashtead Group, the industrial equipment rental company, with the shares higher after the company said it had seen a 26% rise in group revenues to $4.8bn, driven by a solid performance from the rental part of the business. Operating profits rose by 28%, with the company saying it expects to see full year results ahead of expectations.

Rolls-Royce shares are higher after the US army awarded a big contract to Textron’s V-280 Valor Assault Aircraft project of which Rolls is supplying the engines for the new helicopter. The V-280 is expected to eventually replace the notorious Black Hawk.

Vodafone shares have continued to come under pressure despite the announcement yesterday of CEO Nick Read. As CEO of Vodafone Read oversaw a significant slide in the share price, however even with his departure, there is little evidence that existing management have any idea of how to turn around a business that has struggled for the last few years. There was the rejection of the €11bn Iliad deal for its Italian business earlier this year, which was a big missed opportunity to put its finances on a more sustainable footing. It is this vacuum at the top as to what comes next which appears to be weighing on the share price. 

Mondi shares are also lower on the back of a downgrade from Credit Suisse to underperform, while the broker also upgraded DS Smith.

US

US markets have continued to slip back in the aftermath of yesterday’s ISM services report, as the direction of travel when it comes to US rates becomes much less certain. The strength of the ISM report appears to have upset the conventional wisdom that inflation might come down quite quickly, given the resilience of the numbers, as well as the rebound in wages growth seen in Friday’s payrolls report. 

PepsiCo shares have edged higher after the company announced that it was going to have to make hundreds of job cuts, in mainly administrative roles.

Royal Caribbean has seen its shares fall sharply, along with the rest of the sector after JPMorgan said the business was amongst those who were most susceptible to a slowdown due to its higher debt levels. This has translated into similar weakness in Carnival Cruise Lines.

Meta Platforms shares have slumped sharply from 6-week highs after reports that the EU is looking at a regulation that wouldn’t compel users to agree to personalised adverts based on the browsing history.   

FX

The Australian dollar has edged higher after the RBA raised rates by 25bps, in line with expectations, however even though they slowed the pace of rate hikes in November, there appears to be little sign that they are in a mood to stop edging rates higher. There had been a hope that the November slowdown to 25bps might signal that the rate hiking cycle was nearing an end game, due to concerns about their housing market. Today’s meeting gave no indication of that further rate hikes weren’t on the way.

The Canadian dollar is under pressure, sliding to a one month low, ahead of tomorrow’s rate decision by the Bank of Canada, pressured by the decline in the oil price that we’ve seen over the past three days.  

Commodities

After hitting one-week highs at the beginning of the month, Brent crude oil prices look set to record their third successive daily loss with the rebound in the US dollar, and a stickier inflation outlook increases the prospect of a weaker economy heading into 2023. Hopes of a demand boost from a China reopening have been tempered by the realisation that while infection rates remain high any recovery will be muted at best.

Gold prices have rebounded a touch as US yields slip back from their recent peaks. The direction of yields and the US dollar is likely to remain the key driver for gold prices, with next week’s Fed meeting the key catalyst when it comes to the next move in prices.

Volatility

Energy commodities found themselves very much in focus yesterday after the EU’s cap on the price paid for Russian oil came into effect. Although the initial impact here was a modest uptick in prices, gains proved to be short lived with West Texas crude sliding more than 6%, driving one day volatility to 47.54% against 45.15% on the month. It was a similar story for Low Sulphur Gasoil with a corresponding sell-off in the latter part of the session, driving one day vol to 48.98% against 45.64% on the month.

Cannabis stocks continued their rally for most of the session with that US federal level reform still in focus, although a degree of profit taking emerged towards the end of the day. CMC’s proprietary Cannabis basket – a cohort of licensed marijuana growers’ stocks – added around 7% at one point before closing the day just over 1% higher. Daily vol printed 151.72% against 95.27% on the month.

Shares in Credit Suisse had another active session, making a little more headway and closing the day almost 3% higher. That was sufficient to drive daily vol on the stock 111.41% against 75.14%.

And in fiat currencies, the Canadian Dollar lost ground yesterday off the back of speculation that the Bank of Canada may end up reigning in policy tightening faster than the Federal Reserve. Although the loonie lost two cents against the greenback, it was the EUR/CAD trade that saw more pronounced levels of price action. The cross returned to levels not seen since the start of the year, with one day vol coming in at 9.7% against 9.01% for the month.