European stocks roll back, as a wild week draws to a close

Europe

After the strong gains of yesterday, European markets have slipped back heading into the weekend, with the FTSE100 slipping back into negative territory for the week, ending with a slightly more defensive posture, as telecoms and utilities outperform.

This week’s gyrations appear to be symptomatic of a market that is struggling to look through the consequences of central banks who are more concerned about containing increased inflation risk, than they are with supporting economic growth. When you throw geopolitics into the mix in the form of conflict risk in eastern Europe, and you have a heady cocktail of risks, as symbolised by the fact in the space of three days the FTSE100 has done a 313 point round trip from a one month low, before retesting the highs of earlier this month.

The DAX has led the way lower in Europe after the latest data from the German economy showed it contracted by -0.7% in Q4, raising concerns that Europe’s largest economy could slip into recession.  

BT Group is one of the better performers ahead of its Q4 numbers which are due next week.  

Retailers like JD Sports and Next are outperforming after Swedish retailer H&M reported a better-than-expected set of Q4 numbers, which saw the company post a big improvement in pre-tax profits of SEK6bn, helped by a bigger than expected jump in December and January sales of 20%.

New CEO Helena Helmersson also said that she is looking to improve operating margins to above 10%, while closing a host of underperforming stores. H&M has long had an inventory problem, which it is slowly starting to clear, with investors hoping that all these changes mean that the worst of the company’s problems are now behind it. This has helped to push the shares to their highest levels since last summer.

Arbdn shares are higher after selling 40m shares of its stake in FTSE100 peer Phoenix Group for the sum of £264m, sending Phoenix shares down towards the bottom of the index.

Ocado on the other hand is sharply lower after a German court said that their IP claims over AutoStore’s robot technology were invalid.

We’re also seeing new 10-month lows on Scottish Mortgage Investment Trust as weakness in the US tech sector weighs on its assets under management, given its holdings in Tesla, Nvidia and NIO, all of which are well off their highs.

US

US markets have remained under pressure after yesterday’s declines and are on course to close lower for the fourth week in a row.

Today’s December numbers for core PCE Deflator which is the preferred measure of inflation for the Federal Reserve showed another increase, rising to 4.9%, up from 4.7% in November, and its highest level since 1983. The slowdown in consumer spending during December saw personal spending levels decline sharply by -0.6%, while the latest Michigan sentiment numbers showed US consumers were more worried about inflation than at any time in the last 10 years.

Apple’s Q1 numbers have been a welcome outlier to the underlying negative theme today, after posting another record quarter, in what is traditionally its best quarter in a fiscal year. Apple’s Q1 revenue came in at a new record of $123.95bn, well above expectations of $119bn, while profits came in at $2.10c a share, or just under $35bn, with record revenue for iPhone sales, despite supply chain disruptions. Some of these supply disruptions could well bleed through into Q2, however this isn’t expected to adversely impact its ability to shift its products, with strong demand still coming through, although Q2 revenues are still expected to slow to around $90bn.

The nightmare has continued for Robinhood Markets, darling of the retail trader a year ago, the wheels have come off spectacularly in the last few months, and last night’s Q4 numbers have merely served to compound its misery, with the shares down again to new record lows, around $10. The shares are so far underwater from their original $38 IPO price that you’d need scuba gear to locate them now.

Yesterday’s Q4 numbers saw revenues come in at $362.7m, and although it was above the worst-case scenario of $325m, it was still below average expectations. Equities trading revenue fell 35% to $52m from the same period last year. Crypto revenue also fell back, declining for the second quarter in a row, falling to $48m, from $52m in Q3 and a long way from the $233m seen in Q2.  Losses were also larger than expected, coming in at $0.49c a share, or $423.3m. A decline in active users isn’t helping its cause either, as the various meme stocks that drove its popularity this time last year are getting pulverised, as markets start to focus increasingly on whether current valuations are credible.   

FX

The US dollar has continued to grind its way higher, reaching its highest level since June 2020 earlier today, before sliding back. The US dollar index looks to be on course for its biggest weekly advance since June last year. Today’s core PCE Deflator for December, came in at a new 39 year high of 4.9%, slightly above expectations. Speculation continues to grow that the Fed will have to raise rates multiple times to help keep a lid on prices and inflation expectations.  

The pound has pulled back some ground today, and has risen four days in a row this week bringing it close to 23-month highs against the euro, ahead of next week's Bank of England rate meeting, where we could see the MPC hike rates for the second meeting in succession. 

Commodities

Brent crude oil prices have continued to edge higher, pushing above $91 a barrel, and closing in on $92, after Pentagon officials said that some kind of Russian invasion could be imminent. With OPEC+ due to meet next week and due to authorise another 400k output increase next week there must be ongoing disquiet that if prices continue their current trajectory, demand could well get choked off.

Gold has got absolutely battered this past three days, and looks very tarnished from its two-month highs of late Tuesday. The sharp rise in US yields has delivered a big blow to the yellow metal, sending it to a one month low.