FTSE 100 gets a bout of indigestion, US PPI declines in July

Europe

After the gains of yesterday, which saw markets in Europe close at two-month highs, today has been much harder going despite the continued resilience of US markets.

While US inflation appears to be easing, after today’s PPI numbers followed on from yesterday’s weaker CPI number, falling 0.5% on a monthly basis, the prospect of something similar happening in Europe appears to be harder to envisage, and while broader markets are just about hanging onto gains it’s been hard going.

Part of the reason for the underperformance could be that Netherlands natural gas prices for one month delivery, have hit new record highs, moving above their previous highs in March.

Even if US inflation does continue to come down in the next few months, there is no guarantee that inflation in the UK and Europe will do the same, given that Europe is much more susceptible to rising energy prices, specifically natural gas.

The health care sector appears to be giving a dose of indigestion to the FTSE100, with Haleon and GSK both down heavily after Sanofi and GSK were named in a US lawsuit over the use of Zantac, a drug that was withdrawn from use in 2019, over concerns it caused cancer.

Zantac was a drug that was used in treating gastric distress, like heartburn or indigestion. Haleon appears to be being targeted, perhaps unfairly due to having only been recently spun out from GSK.

AstraZeneca shares are lower after confirming the completion of its $1.3bn acquisition of TeneoTwo.

Coca-Cola HBC is higher after reporting a 29.6% rise in H1 revenues to €4.2bn. Volumes rose by a smaller amount, coming in at 1.3bn, however a decrease in margins due to higher costs saw profits fall to €152.9m from €233.1m a year ago.

Ladbrokes owner Entain shares are higher after the company reported that it would be restarting the dividend, after reporting a 19% rise in H1 revenue. Net gaming revenue rose to £2.12bn, up from £1.8bn a year ago. A dividend of 8.5p per share was recommended with management keeping full year guidance unchanged, with full year EBITDA expected to come in between £925m and £975m.

UK based asset manager M&G shares are also higher after reporting a similarly upbeat set of numbers for H1. The company has been on an acquisition spree as it looks to boost its business having done deals with Continuum Financial Services and Sandringham as well as taking a majority stake in Swiss based responsAbility.

Fee-based revenues rose to £653m from £607m, however adjusted operating profit before tax fell to £182m from £327m a year ago. This was largely due to increased operating expenses, and a rise in other shareholder losses due to market movements of £130m.

US

US markets opened higher after US PPI for July confirmed the trend from the CPI numbers yesterday, falling from 11.3% in June to 9.8%. Core PPI also fell, coming in at 7.6%, falling from a revised 8.4%. Weekly jobless claims edged higher to 262k, up from 248k the week before.

Disney shares have pushed above their June highs after Q3 numbers came in ahead of expectations. The various boosts from the parks and studios business helped to boost Q3 revenues to $21.5bn, comfortably beating forecasts of $21bn, while profits rose to $1.09c a share, also beating forecasts of $0.96c a share.

Yesterday’s Q3 numbers also continued the trend of a growing subscriber base as Disney+ numbers rose from 137.7m to 152.1m, with the company also announcing it would be raising prices to $11 a month for its US audience. Most of these new subscribers came from its Hotstar service in India.

After the bell we get to hear the latest Q2 numbers from Rivian, as it continues to ramp up its car production capability. In Q1 the confirmed that the company had built 2,553 vehicles and delivered 1,227 of them. Production had been slowly stepped up during the quarter and management expressed confidence that this would see 4,000 vehicles produced in Q2. Today we’ll get to see whether that optimism is justified. Q1 revenue came in at $95m which was below expectations of $131.2m, while reporting a loss of $1.6bn or $1.43c a share. The company reaffirmed its 25,000 target of annual vehicle sales, despite supply chain bottlenecks which are currently acting as a headwind.

FX

The US dollar has continued its slide against a basket of currencies with the US dollar index languishing close to its lowest levels in over a month, in the wake of yesterday’s lower than expected CPI number.

The euro has also started to edge higher as markets start to price in the prospect of a Federal Reserve starting to cut rates in 2023, while the ECB continues to hike. Quite simply this seems implausible from both sides.

For the Fed to even contemplate cutting rates inflation would need to be much lower than it is now, and need to be much closer to 2%, if not below it. That doesn’t seem likely, while the ECB will struggle to hike rates at the same time as keeping a lid on Italian bond yields.

Commodities

Crude oil prices are back on the rise again as rising European gas prices contrive to push consumption patterns over to what is currently a lower priced alternative. The IEA this morning said it expected demand for crude oil to remain robust even as the global economy slowed due to switching away as gas prices become ever more unaffordable.

Volatility

Yesterday’s softer than expected inflation print from the US gave the country’s equities a boost with this playing out in sharp gains for many indices. The NASDAQ was no exception here with a close on three percent gain being recorded and this proving sufficient to make it one of the most volatile in the asset class, recording a daily print of 34.13% against 28.24% on the month.

That theme of easing cost pressure also translated into an upbeat performance for CMC’s proprietary basket of luxury goods stocks. By all accounts there’s a line here regarding consumers being left with disposable income and the basket advanced around 1.5% off the back of that inflation news. Daily vol came in at 33% against 30.72% on the month.

GoodRx found itself in focus amongst single stocks again. Tuesday’s big move higher and prompt reversion off the back of the earnings overshoot was then followed by further losses on the underlying after an analyst downgrade. Daily vol here came in at 305% against 159% on the month.

The USD/JPY trade was again in focus, falling two big figures off the back of the inflation news then oscillating somewhat through the remainder of the session. That was sufficient to push daily vol to 17.21% against 11.67% on the month, far higher than then traditionally more active pairs such as Dollar Peso which printed 16.36% versus 12.38%..