Europe

European markets have had a slightly more resilient tone today, as some of the biggest losers from yesterday find a degree of buying interest, however we remain well below last Friday’s closing prices, with the FTSE100 needing to get back above the 7,400 level, to have any degree of confidence that this lurch lower is a merely temporary.

Yesterday’s face-ripping US recovery saw a decent start for markets in Europe this morning, but progress has been difficult against a backdrop of 8,500 US troops being put on standby to boost NATO forces near Ukraine, which European markets appear to be taking in their stride, but US markets less so.

The best performers have been in banks with the likes of Standard Chartered, Lloyds Banking Group and NatWest Group clawing back some of their recent losses, while digital education publisher Pearson has also managed to reverse some of yesterday’s decline. BP and Shell are also higher on the back of firmer oil prices.

On the other hand, housebuilders have continued to lag after yesterday’s cladding induced losses, with Berkeley Group shares dropping to a one year low.

The latest trading update from Royal Mail has seen trading come in line with expectations, helping to initially push the shares up on the day, although we’ve since slipped back. Q3 revenues slowed slightly from 2020 levels, coming in at £3.55bn, but were still well above pre-pandemic levels of just over £3bn.

The number of parcels fell 11% from a year ago, at 439m, not altogether surprising given that the UK economy wasn’t locked down to the same extent as it was in 2020. Staff absences did cause some problems during the quarter, which did disrupt service levels to some extent. The company says it expects adjusted operating profits to come in at £500m for the full year.

It seems you can’t keep Unilever out of the news at the moment, as reports circulate that the company is looking to cut thousands of management jobs worldwide as it looks to improve its margins, cut costs and speed up decision making. Having wisely walked away from its £50bn bid for GlaxoSmithKline’s consumer division, the focus is now on management coming to grips with the business they already have, and with reports that activist investor Nelson Peltz is on board the focus has shifted on to how the company is being run, and whether we can expect to see further disposals, on top of the tea and spreads business.

We’ve seen more evidence today of the effect last months “Plan B” measures have had on the hospitality sector, after pub chain Marston’s said that like for like sales fell 3.9% in its latest quarter, although leading up to December sales were up by 1.3%, however this progress was completely wiped out in the aftermath of the implementation of the governments working from home guidance. 

US

In a continuation of yesterday’s volatility, US markets opened sharply lower, after yesterday’s brutal snapback off the lows.

Despite the violence of yesterday’s recovery, the underlying bias for US markets remains very much towards selling the rally, in what could well be a significant shift from the buy the dip mindset that has been so prevalent over the last few years. It should also be noted that since the days of 2008 there is now a new generation of traders, who have never seen a significant downside correction, and by that, I mean a decline of 20% or more, which is only likely to exacerbate volatility even more.

As the Federal Reserve meeting gets underway later today, and concludes tomorrow, a lot of column inches will be devoted to how dovish or hawkish the central bank is likely to be, when we already know that we’ll start to see a lift off on rates in March.

The questions the Fed probably won’t answer is whether we get the already priced 3 rate rises, or whether we get more than that, and when they expect to start reducing the size of its balance sheet, and that could depend a lot on how well the US economy does this year as growth starts to slow. The IMF downgraded its outlook for the US economy for this year to 4%, from 5.2%.

The Nasdaq 100 has led the move lower again, with the biggest decliners once again being the most expensive areas of the market.

AMC Entertainment is under the cosh again as the air continues to come out of meme stocks, with GameStop also lower.

Nvidia shares are also on the back foot on reports that it is looking to pull the plug on its $40bn ARM deal, which is currently being blocked on a few different regulatory fronts.

After the bell Microsoft earnings will be in focus after the shares rebounded strongly from a six-month low yesterday. For Q2 Microsoft expects to set a record for revenues above $50bn, at between $50.15bn and $51bn, while profits are expected to come in at $2.32c a share. personal computing, and gaming was a key gainer in Q1, and this is expected to continue in Q2 with the rollout of Windows 11, supply issues notwithstanding, as well as expectations that revenues from Office 365 will increase. We could also hear more detail on the $68bn Activision deal..  

FX

We’re seeing another strong US dollar story today with another move higher, although we are still below this month’s peaks. US bond yields are once again lower on the day as US treasuries get a safe haven bid, while the Japanese yen is also holding its own. These last two factors suggest that today’s weakness in stock markets is less about the Fed and the uncertain geopolitical situation acting as a global drag on growth.

The latest growth forecasts from the IMF would appear to bear these concerns out as it cuts its global growth forecast for this year from 4.9% to 4.4%, with the fund acknowledging that global risks are tilted to the downside. 

The Australian dollar is also higher after headline CPI surged by more than expected in December.

Commodities

Crude oil prices are treading water currently, with the downside supported by concerns over tight supply and geopolitics, with the weakness in equity markets not really offering any sort of respite in terms of a move lower. Today’s downgrade by the IMF to its global growth forecast would in ordinary times probably have acted as a drag on prices, however on this occasion it barely registered.

Gold prices briefly hit a two month high earlier today, before retreating, with the softness in equity markets and lower yields helping to support prices.

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