Surging gilt yields weigh on the FTSE100

Europe

There’s been a slightly more positive bias for markets in Europe today although the FTSE100 is underperforming a touch with housebuilders getting hit on the back of a surge in gilt yields across the board.

It’s hard to explain why we’re seeing such a sharp rise in UK yields, perhaps the rise in oil prices and the weakness of the pound is prompting concerns about further rate hikes from the Bank of England or higher for longer inflation.

This seems rather strange given that a rise in oil prices acts in a similar way to a rate hike, sucking demand out of the economy so to compound that with further hikes would be dumb. It’s more likely that rates will have to stay higher for longer, but we already know that is probably going to happen anyway.

Nonetheless house builders and real estate stocks are bearing the brunt of the rise in yields, with Barratt Developments, Taylor Wimpey and Rightmove the worst performers on the UK benchmark.

On the flip side, basic resources are helping to limit the underperformance in the UK with gains for Anglo American, Antofagasta and Rio Tinto.

It’s not all doom and gloom despite today’s sharp move higher in yields., UK pub chain and owner of All Bar One, Mitchells and Butlers reported a solid set of Q4 numbers in its latest trading update. A 9.7% rise in like for like sales has seen the pub chain say it expects to see full year like for like sales rise by 9.1% with drinks expected to account for a 9.9% rise and food 8.6%. Against 2019 levels the gain is 10.5%. On the outlook M&B said they expected cost headwinds to abate and to remain at the bottom end of recent ranges, while expressing confidence that the profits will be at the top end of expectations.

Diageo shares are treading water after the drink’s maker kept full year guidance unchanged despite cost pressures showing little signs of abating.  

US

US markets opened flat after weekly jobless claims saw a modest increase to 204k from 202k, while the latest Q2 GDP revision saw personal consumption revised substantially lower to 0.8% from 1.7%, while the headline number was left unchanged at 2.1%. The slowdown in consumer spending is a little worrying given how much of the US economy is driven by consumption.

Chip maker Micron shares have slipped back after the company downgraded its forecasts for Q1, saying that they expected to see a loss of -$1.07c a share. For Q4 the numbers were slightly better than expected with revenues coming in ahead of forecasts at $4.01bn while the loss in Q4 came in at $10.07c a share. For Q1 Micron said it expects to see revenues between $4.2bn and $4.6bn, however margins are forecast to remain negative against an expectation that they would return to positive territory.

Peloton shares have received a welcome lift after agreeing a deal with Lululemon to make co-branded clothing for its online training programs. Lululemon has its own exercise app called Mirror, with Peloton classes and content added to the monthly subscription plan.

Nike shares are in focus after the bell with the consumer very much front of mind. When the company reported in June the company was measured in its forecasts with flat revenue expected for Q1, well below expectations of a 5.8% improvement. Nike reported it was also having problems reducing its inventory levels which are higher than they should be due to lower demand, while the shares have also suffered on the back of recent profit warnings from the likes of Foot Locker whose shares dropped to 10-year lows last month on the back a sharp slowdown in its US market, which saw it post a surprise loss. Nike profits are expected to come in at $0.74 a share.   

FX

The US dollar has taken a bit of a pause today even though we did see a new 11-month high on USD/JPY at 149.70, matching the October 2022 peaks earlier today. With speculation that intervention could come quite soon the moves higher in the US dollar are proving to be incremental in nature, however that doesn’t mean we can’t move through 150.00 and retest the highs of last year in the coming days.

The euro has rebounded from its recent lows, despite German CPI slowing sharply in September, dropping to 4.3% from 6.4% in August in a sign that perhaps the ECB may have been premature in hiking rates earlier this month.

Commodities

Brent crude oil prices have slipped back today, despite making a new 10-month high earlier today. Today's weakness appears to have been driven by some profit taking after US prices hit a one year high, amidst concerns that the continued rise in prices will eventually result in some demand destruction.  

We’ve slipped below the August lows for gold prices in a sign that could see prices fall to new 6-month lows, with a move towards $1,840 an ounce the next possibility. The resilience in US yields continues to knock the stuffing out of the gold price, with the prospect we could see a retest of the February/March lows.  

Volatility

US equity indices set the pace on Wednesday as the recent sell-off continued. There was something of a rebound in the second half of the session, although the trend remains negative as investors account for both an uptick in treasury yields as well as rising oil prices. A better-than-expected durable goods order print threw the market a proverbial bone, but the Russell 2000 proved to be the most active with one day vol of 19.92% against 14.22% on the month, followed by the NASDAQ at 18.5% on the day and 14.71% on the month.

Facebook owner Meta saw its stock looking vulnerable at one point on Wednesday with losses approaching 5% during the company’s latest developer conference. The downside proved to be short lived with the underlying finishing only a fraction down on the day. One day vol printed 88.21% against 50.45% for the month.

Oil prices hit fresh one-year highs late last night following the release of inventory data, showing levels at the Cushing storage hub in Oklahoma had dropped close to operational minimums. Underlying prices on West Texas Intermediate have advanced more than 7% from the week’s lows, with one day vol advancing to 32.89% against 24.86% for the month.

And after yesterday’s note on cryptos there is a little more select activity creeping back in here. Bitcoin cash rallied through levels not seen in more than six weeks yesterday, helping drive one day vol against the greenback to 69.63% compared to 60.01% for the month.