European stocks trade sideways as PMIs paint a mixed picture

Europe

European markets have undergone a bit of a pullback after some mixed flash PMI numbers painted a patchy outlook for certain parts of the economy in the UK and Europe.

In Germany services pushed into expansion territory, while France disappointed. Manufacturing on the other hand was weak in Germany, while it rebounded in France, whereas in the UK manufacturing showed a modest improvement, while services disappointed.

While the DAX and FTSE100 have slipped back, the FTSE250 has edged higher.

The recovery in Associated British Foods share price initially continued today after the Primark owner reported another set of decent quarterly numbers. Total group revenue increased 20% to £6.7bn, with the retail business reporting a 15% increase in revenues to £3.14bn.

The business also saw strong growth in its food business with sugar and ingredients seeing gains of in excess of 30%, with the strength of the US dollar in relation to commodity prices helping boost the underlying numbers. Cost pressures have continued to exert downward pressure on margins.

The Primark business was helped by a strong UK performance with the retailer saying it had increased its market share to 7% of the total clothing market. European trading was also strong with new stores in Romania and Italy said to trading strongly. Performance across all of the retail markets was said to be ahead of expectations, however with the shares at 10-month highs it appears that we’ve seen some modest profit taking kick in as the shares drift lower.

It’s been another positive day for the travel and leisure sector, after a positive note from Liberum on the airlines sector in Europe, upgrading price targets on easyJet and IAG, helping to push easyJet shares to their highest levels in 7 months ahead of the release of their Q1 trading update which is due tomorrow. This positivity is also helping Rolls-Royce shares push to their highest levels in 11 months in the hope that they’ll see higher servicing revenues as engine flying hours pickup.

Carnival shares getting a lift after the cruise ship operator reported that Cunard had reported its best January for bookings than any time in the last decade.

On the downside the slide in AstraZeneca shares has continued, the shares are now down for the 6th day in a row, and have slid by over 9% since closing at record highs 3-weeks ago.

US

US markets opened modestly lower, giving back some of yesterday’s gains as sets in ahead of tonight’s numbers from Microsoft, with the latest PMIs showing a modest improvement on the December numbers, 3M shares are amongst the worst performers after the company reported Q4 numbers that missed expectations on profits, even as revenues came in better than expected. Net sales came in at $8.1bn, while profits came in at $2.28c a share. For 2023 there was disappointment around the outlook, with the company forecasting annual EPS of $8.50 to $9 a share, below estimates of $10.20c. 3M also said that they were looking to cut 2,500 manufacturing jobs as well as taking a $75m to $100m restructuring charge in Q1.

Johnson & Johnson saw a 26% fall in Q4 profits to $3.52bn, although this was still higher than expected. Revenues in Q4 fell to $23.71bn, with the stronger US dollar and higher costs impacting on margins even as international sales held up well. For 2023 the company said it expects to see annual revenues of between $96.9 to $97.9bn, and profits of between $10.45c and $10.65c a share.
Only 24 hours after being upgraded by Barclays AMD is lower after being downgraded by Bernstein to market perform, citing a risk to its margins due to higher costs and competition from Intel.

Microsoft is set to report its Q2 results later today after the market has closed amidst apprehension that the numbers may well miss expectations, after the company announced the loss of 10k jobs last week. When Microsoft reported in Q1 it issued pessimistic guidance, saying that weaker PC demand could see a high 30% decline in Windows revenue, while the sales of Xbox and games has also been in decline over the past couple of quarters. The company is also facing challenges to its acquisition of Activision over competition concerns, with regulators in the US, EU and UK all looking at the deal.  Profits are expected to come in at $2.30c a share, but Q3 guidance is likely to be key.  

FX

The pound initially shrugged off the worst set of public sector borrowing numbers for December since records began, but is close to becoming the underperformer of the day. The UK borrowed £27.4bn with £17.3bn of that being due to interest payments on index linked gilts which are linked to the RPI index. The bulk of the extra borrowing was due to subsidies on consumers on energy bills.

On the PMI front the services sector has seen a worse than expected deterioration in economic activity as the flash number fell to 48 from 49.9. A large part of this is probably down to the various strikes that have impacted on economic activity, particularly rail strikes which are impacting business turnover in and around travel hubs. Today’s weakness could also be predicated on a belief that the weak outlook could prompt the Bank of England to adopt a slightly less aggressive posture on rates when they meet next week to raise rates.

The US dollar has been a mixed bag, with the euro trying to edge higher on increasing interest rate rise expectations.

Commodities

Having risen for two weeks in a row, crude oil prices have slipped back from 6-week highs, as uncertainty about how much of a demand boost, we’ll see and concerns over a weakening US economy constrains the upside. With the latest PMI numbers in Europe and UK showing signs of weakness despite lower energy prices some doubt is creeping in around any sort of rebound in economic activity.

Gold prices have slipped back from another new 8-month high as a today’s rebound in the US dollar serves to act as a brake on recent gains. 

Volatility

Word from the ECB that interest rates were likely to stay higher for longer helped bolster support for banks from across the continent during Monday’s session. This paves the way for higher margins on lending activity and was sufficient to allow CMC’s proprietary basket of EU Banking stocks to reverse the losses picked up at the end of last week. One day vol sat at 27.6% against a one month reading of 24.82%.

Whilst there’s plenty of talk of supply shortages propping up silver prices in the near term, the precious metal tumbled during Monday’s session, briefly hitting lows not seen since mid-December. Many however see the precious metal as a better performer in times of high inflation, something that was perhaps reinforced by the subsequent rebound. One day vol on Silver – US Dollar printed 35.36% against 29.98% for the month.

Fiat currency markets were relatively subdued with slightly higher than usual levels of price action being seen on Sterling – Aussie Dollar. The cross has now given back all of the gains it accrued at the end of last week off the back of that softer than expected Australian labour market news. One day vol printed 10.15%, slightly ahead of the 10% one-month print but still making it the most active currency trade.

And cryptos are once again in focus. Bitcoin is threatening a test of the August 2022 highs, with risk appetite growing as confidence builds that the Fed is nearing the end of its policy tightening cycle. One day vol on Bitcoin USD printed 47.8% against 33.16% for the month.