European markets initially picked up where the left off yesterday as weaker economic data, combined with further declines in bond yields offered hope that central banks are close to being done when it comes to rate hikes.
Europe
The euphoria of a bumper earnings report from US chipmaker Nvidia after the US close also helped initially, pushing the DAX and FTSE100 to one-week highs, however that sugar rush has faded somewhat as the day has progressed with shares retreating from their intraday highs, and bond yields edging back up again.
The gains that we have seen have been cautious with investors fully aware that on a seasonal basis August data can be unreliable, and that the data weakness we saw yesterday could be somewhat of a one-off.
On a sector basis, growth concerns are weighing on the basic resource sector, which is underperforming, with lower copper prices dragging on miners, however the FTSE100 is finding it easier to hang onto its gains due to outperformance in the more defensive areas of the market, with GSK, British American Tobacco and Unilever all performing well.
On the earnings front, Harbour Energy followed Ithaca Energy yesterday by reducing its capex spend for this year, reducing it by $100m to $1bn, as the small UK oil and gas company posted an $8m loss, compared to $984m profit in the same period last year, with the shares of both sliding back.
The effect of the UK governments energy windfall tax has been ruinous for the UK oil and gas sector, not only for profits but also for future investment. While the likes of Shell and BP can ride out a storm of this kind due to their scale ad size, it’s much more difficult for the smaller players whose main operations are UK focussed. There has been talk that Harbour Energy is looking to diversify its efforts elsewhere, and it has been making tentative steps to that end, however the fact remains it generated all but $98.1m of its $2bn H1 sales in the North Sea basin.
On the plus side, after two days of steep losses JD Sports shares have rebounded after being caught up in the backdraft of profit warnings from US peers Foot Locker and Dick’s Sporting Goods.
US
US markets opened higher, led by the Nasdaq, as markets there basked in the afterglow of last night’s blow out report from Nvidia, which saw the US chipmaker blow away Q2 revenue expectations with $13.5bn. Datacentre revenue alone accounted for $10.3bn of that total, a 171% increase from a year ago, sending the share price briefly above $500 and a new record high on the open, although we’ve since slipped back from those early peaks.
While the numbers yesterday were extremely impressive, investors are also acutely aware that Nvidia shares are already up 220% year to date, raising the question as to how much is already in the price.
The numbers are impressive, for comparison in Q1, datacentre revenue accounted for $4.3bn. Nvidia went on to project Q3 revenues of $16bn, plus or minus 2%, as well as approving an extra $25bn in share buybacks, with the shares soaring above this week’s record highs.
The revenue growth is astonishing with the business set to grow its annual revenue from last year’s $26.97bn to $48.69bn in the current fiscal year, and up to $70bn in 2025. Annual profits are expected to surge to $14.60 a share by 2025, a huge jump from $3.34 in 2023.
With that in mind it’s an impressive outlook however there are risks, with Nvidia’s exposure to China being one such potential geopolitical risk given that China accounts for 20% to 25% of its datacentre revenue. Another risk is that Nvidia’s competition is likely to get more intense which could put longer term pressure on margins. It may be number 1 now but its market share is such that it may struggle to go much higher.
Shares in TSMC, AMD and Palantir initially pushed higher on the open on optimism that they will benefit from growth in the AI space, but their gains have also faded, slipping into the red.
Boeing shares have slipped back after announcing it had found a defect in some of its 737 MAX fuselages due to improperly drilled holes in a part that helps maintain cabin pressure.
Snowflake shares are also higher after reporting Q2 revenues of $674m coming in above forecasts. In Q1 the company nudged down its full year outlook for revenues to $2.6bn, and yesterday’s numbers haven’t changed that, after the company guided for Q3 revenue of between $670m and $675m. Q2 losses came in at $0.22c a share, higher than was expected.
In retail, the resilience of the US consumer appears to have benefited Williams-Sonoma despite Q2 revenues coming in lower than expected at $1.86bn. Profits on the other hand came in ahead of forecasts at $3.12c a share, after a solid improvement in margins. The retailer has a longer-term goal to generate annual revenues of $10bn by 2025, and while that now looks unlikely the focus on margin over turnover appears to be being rewarded. The revision to the annual operating margin outlook to 15% to 16%, despite a lower revenue forecast seems to have struck the right tone, despite full year revenues being cut to between -5% and -10%.
On the economic data front, the latest weekly jobless claims numbers showed a lower-than-expected 230k, pointing to a continued resilience in the US labour market, as well as hiring patterns. Core durable goods orders for July were also better than expected at 0.5%.
FX
The US dollar is once again on the front foot, as some of the decline in yields we saw yesterday unwinds a little. The biggest losers today have been the commodity currencies of the Norwegian krone and Australian dollar.
The pound has also continued to look soggy after the latest CBI retail sales volume numbers for August fell to -44, and the lowest since March 2021, indicating that consumer demand is slowly starting to feel the cumulative effects of higher interest rates and higher prices. The weak nature of recent data is prompting markets to pare bets for the number of rate hikes the Bank of England will have to implement before calling a halt.
Commodities
Oil prices could well be on course for 4 days of declines with pricing sinking to a 3-week low, in the wake of yesterday’s disappointing economic numbers, even as global stockpiles fall to multiyear lows. This would mean an even modest pickup in demand could see a sharp spike in prices. Talk that sanctions against Venezuela might be temporarily lifted so that oil there could return to markets has helped to put a lid on recent gains.
European and UK natural gas prices have slipped back for the second day in a row on optimism that the Australian LNG dispute has been resolved with workers set to vote on a deal later today.
Gold prices have pushed up to 2-week highs as expectations of a central bank pause continue to get priced into the bond market on the back of a lower peak for yields.
Volatility
More bumper earnings from NVIDIA as demand for AI innovation shows no sign of abating served to elevate price action for the booming tech play on Wednesday. With results issued at the close, the stock already trading up around 3% on the day added a further 6.5% to finish at fresh all-time highs. One day vol stood at 83.83% against 62.17% for the month.
Sugar prices are in focus yet again after India said it would ban exports for the first time in seven years. As we noted yesterday, poor harvest data was a risk and Indian government sources are now stating that limited rainfall means they won’t have sufficient product to allocate for export quotas. The underlying added around 5% before seeing some gains pared into the close. One day vol printed 50.34% against 38.09% on the month.
A big miss in PMI data from the UK on Wednesday morning unsettled sterling, although losses proved to be short lived, at least against the greenback. One day vol on cable came in at 8.26% against 7.78% on the month, although moves on Euro-Sterling were a little more pronounced, coming off the back of a miss in German PMI prints, too. One day vol was 5.88% against 5.37% for the month.
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