Steady US payrolls report offers a lift at the end of a difficult week

Europe

European markets have struggled for gains initially today, at the end of what has been a difficult week overall as concerns over earnings guidance downgrades and rising long term yields weighed on broader market sentiment.

A mixed US jobs report appears to have stabilised sentiment, pulling the DAX and FTSE100 off their lows, after another slowdown in jobs growth in July and downward revisions to previous months, spoke to the idea that central bank rate hikes have done their job, and that no more are coming.

Today’s gainers have come from the gaming sector with Flutter Entertainment getting a boost on a positive read across after US peer DraftKings reported a solid set of Q2 numbers, as well as boosting its full year guidance.

Rolls-Royce has continued to build on its weekly gains, pushing above 200p for the first time since March 2020, after a solid set of H1 numbers yesterday, and upbeat full year guidance, as the skies continue to brighten on the outlook for this UK marque brand.

Packaging company Mondi is also higher, reversing a lot of the losses we saw yesterday in reaction to disappointment over a miss on H1 sales, and disappointing guidance. Its sector peer Smurfit Kappa is also higher, perhaps due to a positive read-across from Amazon’s strong performance from its online sales business and upbeat outlook.

On the downside, WPP is the worst performer after the advertising company cut its full year revenue outlook, warning that a slowdown in ad spend from its bigger US clients was weighing on its organic growth outlook. H1 revenue still showed a 6.9% increase to £7.22bn but trends were starting to slow. Pre-tax profits fell to £546m. 

US

US markets look set to break their 3-day losing streak, opening higher after July payrolls came in at 187k with the June report seeing a downward revision of 24k to 185k, although the unemployment rate slipped to 3.5%. Wage growth stayed unchanged at 4.4%.

In essence there was something for everyone in this report, weaker jobs growth, however an unemployment rate inching lower and wage growth robust. Ultimately it speaks to a resilient US economy and a Fed likely Fed pause in September, ahead of next week’s CPI report.   

On the earnings front we saw 2 big ticket items in the form of Apple and Amazon with mixed fortunes for both.

There was already a degree of nervousness heading into Apple’s Q3 numbers due to warnings from a number of chipmakers that demand for processors was slowing. Qualcomm, a key supplier to Apple warned earlier this week of lower demand, and Apple’s results yesterday appeared to confirm this trend as iPhone sales came in below forecasts, even though Q3 revenue came in ahead of expectations at $81.8bn.

Despite this outperformance Q3 revenues still fell from the same period last year, the third successive quarter that this has happened, and the first time this has happened since 2016. iPhone revenue fell $39.67bn, while revenues for iPads also disappointed, coming in at $5.79bn., while wearables also fell short at $8.28bn.

On the plus side services revenue rose to a new record of $21.21bn, while Mac revenue beat forecasts at $6.84bn, although it was still below the same quarter last year.

On a regional basis the reopening of the Chinese economy has prompted a continued rebound with revenue there of $15.8bn. What was also notable was that demand for iPhones fell in the US and Japan while inventory levels rose by 49%, perhaps not surprising given that September tends to see the launch of new products as well as upgrades.

Another bright spot for Apple was its stores in India which CEO Tim Cook said had exceeded expectations, indicating that Apple would probably be looking to redouble its efforts there. There was a passing mention of the new Vision Pro which Cook said was being shipped to developers.

In its guidance for Q4, Apple said it expects to see further declines in revenue with iPad and Mac revenue expected to see double digit percentage falls, which has seen the shares fall sharply below its 50-day SMA and a one-month low.     

On the other hand, Amazon’s Q2 results were a strong set of numbers as revenues came in at $134.38bn, an increase of 11%, with outperformance coming from the online stores side of the business as well as AWS. Profits also comfortably beat expectations, coming in at $0.63c a share, pushing the shares to their highest levels since August last year.   

Online stores saw $52.97bn, while Amazon Web Services saw a 12% increase in sales at $22.14bn.

Over the past 12 months Amazon has been cutting headcount after over hiring during covid and said that 5,000 jobs had been cut during Q2. 

Amazon also upgraded its Q3 guidance for sales to between $138bn and $143bn.

DraftKings is also posting strong gains, after Q2, revenues jumped 88% to $874.9m, with the betting company posting a surprise profit of $0.14c a share. Because of this better-than-expected performance DraftKings also raised its full year guidance for revenue to $3.46bn to $3.54bn.

FX

The US dollar has slipped back after the latest US jobs report for July saw a slowdown in hiring to 187k, although we also saw a downward revision of 49k to previous months. On top of a 110k downward revision in June, it is clear that the pace of jobs growth is slowing even as the unemployment rate fell to 3.5%.

Today’s pullback in the US dollar probably isn’t all that surprising, given the pullback in yields which we are also seeing in the wake of today’s jobs numbers, but it does feed into the idea that the Fed is probably done when it comes to further rate hikes.

The performance of the Canadian dollar this week, and today, has been disappointing, not helped by a disappointing jobs report which saw the number of jobs decline during July to the tune of -6.4k, missing expectations of a 25k gain.

The Norwegian krone has seen a strong session today, buoyed by another positive week for oil prices and further bullish noises from OPEC+ who confirmed that recent production cuts announced last month will be extended into September.

The euro has pulled back to the 1.1000 level clawing back its weekly losses.

Commodities

Crude oil prices look set to finish higher for the 6th week in succession after OPEC+ confirmed that recent production cuts announced last month will be extended into September, and possibly beyond that. With prices already at 3-month highs there is a risk that further tightness in the market at a time when the global economy is becoming increasingly fragile could serve to underpin inflation and kill future demand as the hard-pressed consumer struggles to adjust to the lagged effect of central bank tightening measures.

The slide in yields, as well as the US dollar, in the wake of today’s US jobs report has given a lift to gold prices, which have pulled away from 3-week lows, with today’s rebound unlikely to be enough to prevent the first negative week since June.   

Volatility

Shares in Vodafone remained active on Thursday as the market seemingly remained unconvinced over that reseller agreement in mainland Europe. The stock traded in a range exceeding 2% during the session, finishing at two and a half week lows as a result. One day vol stood at 63.32% against 37.53% for the month.

Natural Gas prices were in focus on Thursday as attempts to price in rising demand and falling output saw the underlying reverse some of the losses from earlier in the week. One day vol stood at 55.04% against 47.46% on the month. Gasoline prices dipped briefly lower during yesterday’s trade, testing two-week lows although consensus appears to be that reduced refinery capacity and increased demand will continue to lend support here in the medium term. One day vol on RBOB Gasoline printed 37% against 29.66% for the month. Similar elevated levels of increased price action were seen across other distillates, too.

In fiat currencies, Sterling was the stand out in the wake of the Bank of England’s rate hike. Amidst some calls that the policy tightening cycle may be nearing an end, the quarter point increase resulted in some weakness for the pound, although this had little lasting impact. Cable ended the session little closed with one day vol of 9.13% against 7.83% on the month whilst Euro-Sterling printed 7.2% on the day and 5.76% on the month.