Weaker US dollar and lower yields push equity markets higher

Europe

European markets have continued to trade cautiously, with the DAX trading above its 200-day SMA for the first time since February this year, as well as putting in a fresh 3 month high, with the weaker US dollar appearing to help to give sentiment a lift, as voting begins in the US midterm elections.

The FTSE100 has once again been the laggard, with BP and Shell acting as the main drag on the index, with all other sectors predominantly positive.

Associated British Foods full year results has shown that annual revenues rose by 22%, to just shy of £17bn, while adjusted profit before tax rose 49% to £1.35bn.

The Primark business which accounts for just under half the sales saw a 38% rise in revenues to £7.7bn, while also seeing an improvement in adjusted operating profits and margins, although rising energy prices and input costs are proving to be challenging. For next year Primark’s adjusted operating margin is expected to fall to lower than 8%, on the back of higher costs and keeping prices unchanged for both the winter and summer ranges.

For the rest of the businesses, Grocery saw a modest decline in operating profits and margins, due to rising wheat, energy and distribution costs. Sugar saw a decent increase in revenues and operating profits, however margins declined, and it was the same pattern in agriculture.

Despite the increase in costs and pressure on margins, combined with the fact that the shares are down over 20% year to date, the shares are up on the day. Also having a good day is B&M European Retail, whose own shares are down over 40% year to date, with the wider retail sector enjoying some positive momentum in recent days, with small gains for the likes of Frasers Group and Next.

On the downside housing stocks have taken a hit after Persimmon’s latest trading statement showed that the economic uncertainty in the UK economy is starting to impact its sales numbers and push up cancellation rates. The reference to rising interest rates in impacting weekly sales and forward sales suggests the prospect of a slowdown next year. Private weekly sales per outlet fell to 0.60 from 0.78 a year ago.

The house builder did say it was on track to deliver its full year target of 14,500 to 15,000 homes, although there was some concern about the risk of higher cancellation rates, which have increased to 28% from 21%, in the preceding 12 weeks. 

Sales, marketing, and support services company DCC shares dropped sharply to their lowest levels since March 2020, despite reporting an increase in H1 revenues and profits. Pre-tax profits rose to £132.2m while revenues rose to £10.48bn, an increase of 44%. Today’s move seems somewhat of an over-reaction even if the results were slightly below expectations, given that H2 generally tends to be the stronger half of the business.

US

With voting underway in the US midterms, US markets have opened modestly higher, carrying on the momentum from the last two days.

Early movers have been ride sharing company Lyft whose shares have plunged after its Q3 results showed it was losing ground to Uber. Active riders came in at 20.3m, below forecasts of 21.1, and still below the level’s pre-pandemic. Losses also came in higher than expected at $422.2m, although revenue did improve to $8.3bn.

TripAdvisor shares have also dropped sharply after reporting Q3 revenues of $459m but falling short on profits. Q4 guidance was also soft in the same way as we saw with Airbnb earlier this month, with slightly lower revenue, compared to Q3, and lower EBITDA margin.

Take-Two Interactive, the mobile and console gaming provider, whose games include GTA, also fell sharply after falling short on Q2 revenues that came in shy of expectations at $1.5bn. For the rest of the year the company, which took over Zynga earlier this year, said they expected losses to come in between $631m and $674m, well above previous estimates.

Tesla shares are lower after the electric car company issued a recall to 40k 2017-2021 Model S and X models over a power steering assists issue.

After the bell we have the latest Q4 numbers from Disney, with the main focus on its streaming numbers for Disney+ after the company raised prices to $11 a month in the US. Disney now faces twin challenges, how to continue to grow its subscriber base as the cost-of-living squeeze continues, while its parks business is likely to take a hit from the announcement that its Shanghai resort will close indefinitely due to rising cases of Covid in China. Profits are expected to come in $0.53c a share.  

FX

Could we already have seen peak US dollar? Looking at the US dollar index and the price action in EURUSD there might be a case for such an argument, with the euro back above parity, and finding support at higher levels. Since the peaks back in September the US dollar index has been trending lower, with lower highs and lower lows despite the rise in US yields.

The US dollar is also losing ground against the Japanese yen, retesting the lows of last week as well as the 50 day SMA.

The pound is also edging higher on reports that there might be a breakthrough between the UK and EU on the Northern Ireland border, with cable putting in its highest level this month above 1.1550.            

Commodities

Brent crude oil prices have once again slipped back after failing to gain a foothold above $100 a barrel. For all the talk that China might be looking at easing covid restrictions, rising infection rates in Guangzhou and Hong Kong as the weather gets colder suggest that the prospect of this remains some way off. The fact is that as winter approaches infection rates are only likely to increase, which puts the prospect of a reopening further away than ever.

With the US dollar coming under pressure and yields continuing to slide, gold prices have broken above the $1,680 level to push up to the $1,700 area, and a one month high.

Volatility

US Natural Gas prices remain turbulent with the market giving back some of the recent gains despite colder weather being forecast. With stocks still looking plentiful, bulls are finding themselves squeezed. By yesterday evening, the underlying had given back most of the session’s gains although prices do remain meaningfully above the late October lows. One day vol sat at 102.87% compared to 73.45% on the month.

Crypto activity was in evidence during Monday’s session too, with several alt coins seeing significantly elevated levels of price action. Stand outs here included Solana where daily volatility stood at 105.79% against 67.19% on the month and Dash which came in at 91.26% versus 57.28%. There are once again concerns over structural parts of the crypto industry which may be facing collapse, and this appears to be driving the latest wave of negativity.

Across equity indices and once more it’s Hong Kong that is dominating. The Hang Seng continues its rebound from the late October lows, with one day volatility printing 67.53% against 46.19% on the month.

And in single stocks, Australia’s Westpac Bank was in for a turbulent day after a mixed set of earnings. EPS beat expectations but the report also flagged a higher cost outlook. One day vol was recorded as 62.4% against 32.79% on the month.