Europe

After an initially positive start to the day, sentiment in Europe has deteriorated as the day has progressed after UK inflation surged into double figures to 10.1%. This prompted a surge in yields in a sign that not only are higher prices on their way, but also the risk of higher rates, and possible recession, not only in the UK, but across Europe as well.

This in turn prompted a decline in US futures after the S&P500 failed to overcome a key technical level during yesterday’s session.

Most of the early weakness is being seen in basic resources and financials as recession concerns once again return to the fore.

These concerns appear to be being reflected in the market reaction to the latest H1 update from Persimmon which has seen the shares slide further, even allowing for the fact it’s one of the worst performers year to date on the FTSE100.Today’s decline has come despite the house builder reporting numbers broadly in line with expectations, whilst maintaining its full year guidance.

While management are optimistic about H2 investors are less so given the darkening economic outlook. With another 50bps rate hike in September from the Bank of England quite likely, doubts are growing that Persimmon will be able to maintain its margins, as well as meet its target of 10% growth in outlets by the end of the current year.

Cineworld share price has dropped by over 40% to a new record low today after the cinema chain announced that recent admission levels had come in below expectations, and that it may well have to take action to bolster its balance sheet and restructure its finances.

Management appears to be blaming a limited film slate that is expected to continue until November 2022, potentially impacting the company’s liquidity position in the near term. Unsurprisingly this hasn’t gone down well with investors over concerns that Cineworld may well have to raise extra capital by way of a shares issue, or other refinancing package.  

Today’s announcement is even more unexpected given the recent update from US based AMC Entertainment who said that the new Dr Strange film and Top Gun: Maverick had seen ticket sales double, as US punters flocked back to the big screen. AMC also said that July saw the highest monthly attendance in US theatres since December 2019 as confidence returned. This raises the rather awkward question as to what AMC are doing well that Cineworld clearly aren’t.

If Q1 proved to be a disappointment for Balfour Beatty, Q2 has been much better with the construction company posting a big jump in H1 pre-tax profit from £55m a year ago to £86m, despite a modest decline in revenues. The improvement was driven by UK construction which returned a profit of £18m, after a £23m loss last year.

The company has continued to focus on higher margin work, boosting its order book to £17.7bn, while upgrading its support services margin guidance to the upper end of the 6% to 8% range, while re-iterating its margins guidance for UK construction at 2-3% and US construction in the 1-2% range. Balfour also said that it expected underlying profit from operations to be ahead of its previous expectations.

US

US markets have taken their cues from the weakness in European markets, opening lower after US retail sales for July came in unchanged, while the June numbers were revised down to 0.8% from 1%

Having seen Walmart beat expectations yesterday after issuing a profit warning a few weeks ago, there was some expectation that Target would follow suit. This expectation proved to be misplaced as Target missed the mark on revenues and profits, sending the shares lower in early trade. Q2 revenues came in at $25.65bn, below expectations of $25.85bn, while profits came in at $0.39c a share, against a forecast of $0.77c. Operating margins fell sharply to 1.2% from 2.1% as the retailer cut prices to clear excess inventory.

For the rest of the year Target says it still sees full year revenue growth in the low to mid-single digits.

Manchester United shares have risen sharply after Tesla CEO Elon Musk joked that he might consider buying the club. It is also being reported that the Glazers are said to be open to a sale of a minority stake.

Krispy Kreme Q2 numbers left a bitter taste in the mouth after the doughnut maker cut its full year revenue forecast to $1.49bn-1.52bn from $1.56bn, as well as its profit guidance to $0.31c a share. Q2 revenue also came in short at $375m while profits fell short of consensus at $0.08c a share.

The meme stock craze is back with Bed Bath and Beyond shares up again today. Over the past few weeks, they’ve risen over 300% in the face of more downgrades. Only last year the company was branded un-investable by several banks who dropped coverage of it, due to the immense volatility which made assigning a fair valuation of the business almost impossible. 

FX

The US dollar has continued to move higher after retail sales for July showed little sign that US consumer spending was slowing significantly.

It was becoming increasingly obvious as far back as March, given the direction of commodity prices at the time, that headline CPI in the UK was likely to hit 10% by the summer. While some may argue that this comes with the benefit of hindsight, it doesn’t. Concerns were being raised back then that the Bank of England was behind the curve. It isn’t therefore too much of a surprise to see today’s UK CPI numbers push through 10% for the first time since the early 1980’s. It has also thrown into sharp relief the Bank of England’s failings once more when it comes to its inflation mandate, with the central bank being a little too cautious. Once again it was food prices that drove the gains, not surprising given those Kantar numbers yesterday, while petrol prices were also a factor despite recent declines. Core prices also rose sharply to 6.2%, which is probably more of a worry, and which is likely to mean that the Bank of England will have to move by another 50bps in September, with the potential for more to come by year end.

The worst performers have been the commodity currencies with the Australian dollar under the most pressure on global slowdown fears, while the New Zealand dollar has also fallen despite the RBNZ raising rates by 50bps to 3% earlier today.   

Commodities

Crude oil prices fell to a six-month low earlier today as rising recession fears weighed on sentiment, although a big inventory draw has pulled it off the lows. A sharp rise in UK inflation is unlikely to be confined to the UK, raising concerns of weaker demand across Europe more broadly. With Chinese demand also set to remain weak due to on-off covid-19 restrictions we could see further weakness in the weeks ahead.

Rising yields and a stronger US dollar are weighing on gold prices, after the peaks of last week, and ahead of the release later today of the latest FOMC minutes, although with the Jackson Hole symposium due to start next week, any hint of dovishness is likely to be short term at best.

Volatility

Price action proved to be relatively limited during yesterday’s session but the ADRs of Chinese live streaming platform DouYo found themselves in focus. The stock jumped at the start of the week in response to better than expected earnings news, but the bulk of the gains have proved difficult to sustain. There are ongoing concerns over the potential impact of regulation in this sector which continue to take a toll, but with the potential for well telegraphed fundamental messages to be seen here, further meaningful movements in the underlying are possible. Daily vol came in at 218% against 135% on the month.

Dogecoin tacked on a further 10% during yesterday’s trade, with that risk on mindset being seen as driving support for the digital asset. Daily vol here jumped to 112% against 81% for the month as a result, outstripping price action on others in the asset class.

Cotton prices did attempt a break lower earlier on Tuesday, but the downside here proved to be short lived. That USDA report from last week is still continuing to lend support, whilst drought in many parts of the US is seen as likely to take a toll on yields this season, too. Daily vol came in at 65% against 51% on the month.

Finally, a reversion in the Dollar against the Yuan ensured volatility remained elevated here, too. There’s no shortage of speculation that Beijing could encourage further weakness here in a bid to shore up the economy, however. Daily vol printed 6.09% against 5.14% on the month.

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