It’s been another positive session for markets in Europe with the DAX pushing up to a new record high, edging past its previous peaks back in May, with markets increasingly taking the view that the Fed could well be done when it comes to hiking rates.
Europe
Another soft inflation reading, this time on the PPI measure has helped to feed this narrative and will pose a challenge to a Fed that wants to keep the option of further rate hikes on the table.
A rebound in energy and commodity prices is helping to support the FTSE100, on optimism over Chinese demand, which over the past few weeks has been predominantly negative, led by the likes of Antofagasta, Anglo American and Glencore.
Shell shares have pushed higher after announcing 15% increase in the dividend and share buybacks of at least $5bn for H2 2023.
Spending on capex would be reduced to $22bn-$25bn for 2024/2025, with an enhanced focus on performance, and discipline.
Shell also said it was planning to invest $10-15 billion across 2023 to 2025 to support the development of low-carbon energy solutions including biofuels, hydrogen, electric vehicle charging and CCS. New CEO Wael Sarwan also pushed back on the narrative of renewables at any cost, saying that “We need to continue to create profitable business models that can be scaled at pace to truly impact the decarbonisation of the global energy system. We will invest in the models that work – those with the highest returns that play to our strengths” in a broadside at the some of the recent reckless narrative and almost hysterical calls to cut back on fossil fuel use whatever the cost.
Vodafone shares have edged higher from yesterday’s 25-year lows after it was confirmed that it would merge its UK business with Three’s UK business to create the UK’s number one mobile telecoms provider. Will this be the catalyst for a share price turnaround. Shareholders will certainly be hoping so after years of decline which began in the aftermath of the Verizon disposal back in 2014, assuming the merger makes it past the CMA, which on current form seems unlikely.
Entain shares have dropped sharply after the company issued £600m in new shares at a discounted price of £12.30 to fund the acquisition of Polish sports betting company STS. The reaction has been somewhat mixed with some raising the question as to why it was necessary to dilute shareholder value to fund such a small deal.
US
US markets underwent a flat open after the latest May PPI numbers showed a decline of -0.3% on a month-on-month basis while annual prices rose by 1.1%, a sharp fall from April’s 2.3%.
The decline in prices over the last few months appears to suggest a distinct disinflationary bias with markets taking the not unreasonable view that we could be at the end of the current rate hiking cycle. This trend should make for an interesting guidance dynamic when the Fed concludes its two-day meeting later today, with many expecting a decision to hold rates, while keeping open the option of a further hike.
Google owner Alphabet shares are in focus after the EU charged the company with breaching antitrust rules in advertising technology and had been doing so since 2014. This could result in the European Commission looking to call for a breakup of the business.
Chipmaker AMD is higher on reports that Amazon is considering using its new MI300 series AI chips, which the company showed off at an event yesterday. These chips are expected to rival the types of chips made by Nvidia.
Tesla shares have slipped back despite announcing further price rises, for its Model Y SUV in the US, as it looks to close higher for the 14th day in a row.
FX
We could be set to see the US dollar come under further pressure if as expected the Federal Reserve keeps rates on hold later today. While Powell is likely to keep the prospect of another rate hike on the table for July if the data keeps coming in as it has been, the most likely outcome is that we may have already hit peak US rates.
Today’s May PPI numbers merely serve to reinforce that narrative with a month on month decline of -0.3% and a year-on-year rise of 1.1%, down sharply from 2.3%m in April, which suggests that further rate hikes are probably unnecessary.
If this is the case, then the markets next calculation will need to be on how long rates are likely to stay at current levels. For this the Fed can offer guidance in terms of the dot plots but based on the economic data right now, the likelihood of another rate hike in the next few weeks seems unlikely, which means if they don’t move on rates today the Fed is probably done.
The same can’t be said for the UK where inflation is much higher, however today’s GDP numbers for April showed the economy rebounded by 0.2%, partially reversing the -0.3% decline seen in March, helped by a rebound in services of 0.3% which offset weak construction and manufacturing activity. This is welcome news with the recent wages data helping to cushion the effects of rampant and sticky inflationary pressure. While real wages are still negative, we are now seeing average wage growth pushing above core inflation in a trend that could start to help undo the damage to real incomes over the past 18 months. The pound is likely to benefit from further from this trend with today’s move to 14-month highs at 1.2680, opening the potential for a move towards 1.3000.
The euro has also broken above its recent range highs at 1.0820 ahead of tomorrow’s ECB rate meeting, where we can expect the ECB to hike rates by another 25bps, as it continues to play catchup to its peers on its own rate hiking cycle.
Commodities
Brent crude oil prices have continued their rebound from yesterday, helped by a weaker US dollar, and improved expectations over Chinese demand. Prices are also being helped reports that the US government is looking to buy 12m barrels of oil this year, as it looks to replenish its Strategic Petroleum Reserve.
Gold prices have also edged higher, ahead of tonight’s Fed meeting, as lower yields and a weaker US dollar pull prices off their recent lows.
Volatility.
US tech stocks remained in focus on Tuesday, with a mixed performance in the wake of Oracle’s earnings release at the start of the week. Despite announcing a new AI microchip that could challenge NVIDIA’s dominance, shares in AMD fell back, leaving one day volatility to come in at 99.84% against 73.81% for the month. In contrast however, Adobe continued to make progress ahead of its earnings release due on Thursday. One day vol here came in at 71.27% against 51.68% for the month.
In commodities, Sugar prices remain under pressure despite those short-term concerns over the impact of the El Nino effect. Recent data from Brazil is showing bumper harvests but conversely India is set to limit exports so this contract could well see strong fundamental drivers in play in the months ahead. One day vol on raw sugar sat at 51.74% against 39.31% for the month.
For fiat currencies, it was the Swiss Franc that found itself in focus. With the ECB expected to continue hiking interest rates for some time yet, alongside the prospect of falling Swiss inflation, EUR/CHF advanced to levels not seen in around six weeks. One day vol stood at 5.4% against 4.86% on the month.
And that softer than expected US inflation data delivered a bonus for the nation’s banking stocks. With markets now pricing in almost no prospect of a rate hike being announced today, this bolsters the idea that the US can now avoid slipping into recession. CMC’s proprietary basket of US banking stocks added almost 1.5% during the session, leaving one day volatility at 57.59% against 43.38% for the month.
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