Weak US dollar helps to lift European markets to five-month highs

Europe

We look set for another positive session for markets in Europe today with the DAX making another 5-month high on the back of last night's Fed minutes, which saw most officials backing the slowing of the pace of hikes soon, with several officials seeing risks from further rapid hikes.

At a time when concerns are growing about a slowing of economic activity and possible recession there is relief that central banks appear alive to the threat of being too aggressive on further tightening measures in the coming months.

The outlook is also being helped by lower energy prices, with a stronger pound and euro, which is helping to dilute the inflationary impact of oil prices. In the last few weeks crude oil in GBP terms has dropped to its lowest level since before the Russian invasion of Ukraine at £70 a barrel, having been as high as £100 in the summer. This does rather beg the question as to why pump prices aren’t back at February levels of around 150p a litre?

Airlines are doing well today after a decent set of H1 numbers from Jet2, which has seen their shares rise quite strongly. Jet2 reported H1 revenues of £3.56bn and a big jump in profits to £356m, a welcome rebound from the losses of £163.5m last year. The company also said it was on track to beat full year expectations revenues and profits on the back of buoyant customer demand. The airline also said its seat capacity was 14% above pre-pandemic levels. The disruption over the summer did incur extra costs of £50m which included compensation for delays. This rebound into profit is a welcome relief for an industry that has faced enormous challenges over the past two years, and perhaps signals that the worst is behind it, even with the headwinds of higher fuel and labour costs.  

Kingfisher shares have been on an upward track since hitting two-year lows in October, after a disappointing market reaction to its H1 numbers. H1 like-for-like sales came in at £6.81bn, a decline of 4.1%, year on year, although on a pre-pandemic basis, they showed a rise of 17.4%.

Today’s Q3 numbers have shown some improvement, even as the shares have slipped back, with total group like-for-like sales rising 0.6%, with the key areas of growth being its international markets of Poland, Romania and Iberia.

The UK business saw an increase of 0.1%, with Screwfix showing strong growth of 4.9%, helping to offset a weak performance in the B&Q business. The UK business was impacted by the warmer weather in October as well as the extra bank holiday in September.

As far as Q4 business is concerned, November has seen a pick up with like for like sales up 2.8% thus far, with the company keeping its full year profits guidance of £730m to £760m unchanged.

Leading up to today’s H1 numbers Dr. Martens shares had enjoyed a decent run up from their October lows on optimism that the company would be able to deliver high teens revenue growth. This morning’s numbers have seen the shares take a kicking, after delivering revenue growth of 13%, slightly shy of guidance at £418.6m. This and the decline in profits before tax of 5% to £57.9m helps explain why the shares have fallen back sharply.

The company said it was still confident on delivering on its high teens revenue growth target, despite missing on its DTC revenue growth targets.   

US

US markets are closed for Thanksgiving.

FX

The US dollar has continued to sink on the back of last night’s Fed minutes, especially against the Japanese yen and looks set to move back to the lows of earlier this month, and potentially see further losses towards the 130.00 area.

The pound has also broken higher and looks set to head towards the 200-day SMA level, currently close to the 1.2200 area, while it has also continued to gain against the euro, in the wake of comments from the Bank of England’s Dave Ramsden who said he was erring towards further tightening of monetary policy, given a lack of confidence that domestic inflation pressure is easing.  

Commodities

Crude oil prices are continuing to feel the pressure from rising Covid cases in China, as concerns over demand outweigh worries over supply. US oil prices are also below $80 a barrel which could prompt some buying from the US government as it looks to replenish its Strategic Petroleum Reserve. This is something that the Biden administration indicated they would look to do back in October, if prices fell below $80 a barrel.

Gold prices have continued to recover from the lows of this week on the back of last night’s Fed minutes. With US bond markets closed for Thanksgiving the weakness in the US dollar is driving the gains, although the slide in yields last night is also helping.    

Volatility

It’s been a rather quiet day for price action across the board, with few notable outliers. Shares in Australia’s Talga Resources made good headway off the back of well telegraphed news that they were to push ahead with support from the European Investment Bank to drive development of a mining site in Sweden. Shares added almost 9% as a result, driving one day volatility to 184% against 161.43% on the month.

Earnings news from HP has proved supportive of the share price too, with some solid gains heading into the close last night. One day vol here advanced to 73.63% against 56.32% on the month as investors bought into the likely benefits of cost savings.

Fiat currencies remained subdued on Wednesday and the situation was broadly similar for cryptos with only a couple of outliers here. Litecoin was the most notable here, which topped off gains of more than 30% since Monday to reach six-month highs as a result. One day vol printed 152.57% against 111.34% on the month.

And oil prices remain back in focus, with a number of fundamentals seen as driving the market. Disappointing US PMI data suggested business conditions were deteriorating faster than had been expected, whilst rising COVID cases in China are also proving to be a cause for concern. One day vol on Brent Crude came in at 46.45% against 39.93% on the month.