European stocks tread water as yields edge higher

Europe

European markets have struggled for direction today as we come closer to the end of what has been a positive month and ahead of month end, which is due tomorrow.

We also have the small matter of three very important central bank meetings later this week which have the potential to introduce high levels of volatility, while yields on government bonds have pushed higher after Spanish core CPI unexpectedly surged to a record high in January to 7.5%.

This morning’s sharp jump in Spanish CPI appears to cast doubt on the recent peak inflation narrative which has dominated market discourse this past few weeks and could well complicate the central bank response later this week, when it comes to future rate rise expectations. This slight reset of expectations is pushing yields higher, and weighing on European stocks, with the FTSE100 outperforming.

Sainsburys shares have edged to the top of the FTSE100 on reports over the weekend that Bestway, despite its denials that is was looking at an acquisition last week, may well be looking to do exactly that. It’s important to remember that the hurdles to an acquisition remain quite high given that they would have to convince the two largest shareholders of Qatar and Vesa Investments of the merits of any deal.

After a solid H1 performance and decent profits in its H1 results, Ryanair has followed on from another decent quarter, posting Q3 revenues of €2.31bn, a 57% increase from a year ago. It has also managed to increase its load factor to 93%, while posting €211m in profit after tax.

Ryanair also says it expects to increase full year traffic to 168m passengers while maintaining solid control of its costs. Fuel in 2024 is hedged at $88 a barrel and $71 a barrel for the rest of 2023, although the airline has admitted it will probably post a loss in Q4 due to the absence of Easter in March, sending the shares into the red for the day. Full year profit after tax is expected to be between €1.325bn and €1.425bn.

Ahead of its full year numbers later this week Shell has announced it will be making some changes to its organisational structure and businesses. Its Integrated Gas and Upstream businesses are set to be combined from 1st July, while the Downstream business will be rolled into a new Renewables and Energy solutions business.

Unilever shares are also in focus after announcing the replacement of CEO Alan Jope. Hein Schumacher will take over the reins on 1st July 2023 and comes from RoyalFriesland Campina.  

US

US markets opened cautiously lower, taking their cues from the weak leads from markets in Asia and Europe, with trading likely to remain subdued until this week’s central bank meetings are out of the way.

Ford shares have slipped back after the company announced that it would be cutting prices on its electric powered Mustang as it looks to react to the recent price cuts by Tesla a few weeks ago. The company said it would be cutting prices by an average of $4,500 in a move that it says it will be able to mitigate by increasing production capacity.

The biggest drag has been the Nasdaq 100, which is leading the weakness, giving back of some week’s strong gains, at the same time as US treasury yields edge higher, and the US 2 year yield back at its highest level in almost two weeks.

FX

The euro has edged back above 1.0900 again after the latest Spanish inflation numbers pointed to a sharp rise in core prices in January to 7.5% , and a new record high. So much for the peak inflation narrative that has dominated the market discourse over the past few weeks. It could be that there are specific reasons for this upside surprise to Spanish CPI, however the fact that it has come just three days before the latest ECB rate meeting, its further ammunition to the hawks on the governing council even as the Germany economy contracted by -0.2% in Q4.  

Commodities

Crude oil prices have slipped back despite reports of a drone attack in Iran and escalating tensions in the Middle East. With OPEC+ expected to meet later this week, there is little expectation that we will see any changes to current output levels, as China’s economy continues to rebound from its weak performance in Q4.

With so much uncertainty ahead of this weeks Fed meeting gold prices have slipped back, although the lows for the last 5 days have been pretty steady at around $1,915 and $1,920. A hawkish surprise from the Fed could see prices slip back towards $1,900 in the short term.    

Volatility

Diageo continued to struggle heading into the weekend break following Thursday’s interim results. These highlighted slowing sales in the US, with the stock losing more than 7% on the week and trading down to 10-month lows in the process. One day vol sat at 64.2% against 31.54% for the month.

Global supply woes are helping prop up sugar prices with the US contract pushing out to fresh highs for the year on Friday. That took gains over the last few weeks to more than 10%, driving one day volatility to 34.57% against 31.65% on the month.

Fiat currencies were somewhat calm ahead of the weekend break, but cryptos provided some price action. Bitcoin tested the $23,000 level repeatedly, with one day vol on the legacy coin coming in at 37.98% against 34.94% for the month, but a 20% run up for Avalanche on Friday afternoon left the crypto to print daily vol of 90.97% against a monthly print of 81.26%.

And Natural Gas prices continue to fall, with last week seeing closing levels of under $3, something which hasn’t been posted since May 2021. Warmer weather in both the US and Europe is driving stock piles and turning traders increasingly bearish over the outlook. One day vol on the US Nat Gas contract sat at 92.99% against 91.94% for the month.