It’s been a subdued end to a positive week for European markets, with the FTSE100 pushing up to a 2-month high before slipping back, while the DAX has managed to close at a new record high, despite the German economy stagnating in Q2.
Europe
With price pressures in Germany also slowing more than expected in July there is a sense that this week’s rate hike by the ECB may well have been its last, with a number of ECB policymakers expressing increasing caution over the growth outlook.
AstraZeneca is the main reason the FTSE100 is outperforming its European peers after reporting a strong set of Q2 numbers, as well as signing a deal with Pfizer to acquire a portfolio of rare disease gene therapies. The deal signed by AstraZeneca’s Alexion arm will help the company cement its position at the forefront of rare disease gene therapy treatments. Q2 revenues came in at $11.42bn, and profits of $2.15c a share, comfortably beating forecasts, driven primarily by solid growth in its Imfinzi and Farxiga drugs, while Tagrisso revenue fell short. Astra reiterated its full year guidance for 2023, all the while revenues from its Covid-19 set of products are set to decline significantly.
NatWest Group shares are also higher despite seeing Q2 net interest margin decline from the levels we saw in Q1 in a similar manner to Lloyds who also had the same problem. Unlike Lloyds, NatWest downgraded its expectations for net interest margin for the year to 3.15% from 3.2%, based on the assumption of a Bank of England base rate of 5.5%.
Standard Chartered Bank is also seeing solid gains after reporting a 27% increase in Q2 adjusted pre-tax profit to $1.6bn, on operating income of $4.56bn. The bank also upgraded its full year guidance for income to between 12% and 14%. The bank also announced a $1bn share buyback.
It’s also been a good day for British Airways owner IAG, reporting a record H1 operating profit of €1.26bn, on total revenues of €13.58bn. Profits after tax came in at €921m, compared to a €654m loss a year ago.
Capacity is back at 94% of 2019 levels, and is expected to increase to 97% by the end of the current fiscal year, with Q4 capacity at 30% booked.
The airline also saw a sharp fall in net debt from €10.38bn to €7.6bn in a sign that the current recovery is putting the balance sheet back on a more sustainable footing.
US
US markets opened higher after the latest core PCE inflation numbers showed that price pressures subsided further in June, slowing to 4.1% and the lowest level since September 2021, while personal spending and income remained resilient.
Today’s numbers served to reinforce the goldilocks nature of recent US data, with inflation continuing to slow, and income and spending holding up well.
Intel shares have moved higher after reporting a solid set of Q2 results, as revenues came in at $12.9bn. The outperformance was led by its client computing division which saw revenues come in at $6.78bn. The company also saw a decent improvement in margins to 39.8% while the chipmaker unexpectedly moved back into profit of $0.13c a share. Intel also raised its guidance for Q3 to between $12.9bn and $13.9bn of revenue and profits of $0.20c a share, with gross margins expected to rise to 43%.
Roku shares are also performing well after the video streaming platform posted an 11% rise in Q2 revenue to $847.2m, with losses coming in below forecasts at $0.76c a share. Active clients rose 16% to 73m, while streaming hours also rose strongly. The company also upgraded its forecasts for Q3 to $815m while reducing EBITDA losses to $50m.
On the energy front we’ve had the latest numbers from US giants Exxon Mobil and Chevron and they have followed a similar pattern to Shell’s numbers earlier this week. Exxon had already warned earlier in July that profits would be lower, however today’s numbers have served to underscore the impact of the recent sharp fall in prices and the impact on margins.
Exxon Mobil Q2 revenue fell to $82.9bn, a decline of 28%, while profits fell 56% to $1.94c a share, or $7.9bn, a sharp fall from last year’s $4.14c a share, and $17.85bn. Production overall was higher than a year ago, however capex spending is also trending at the upper end of the $25bn annual target set at the start of the financial year.
It’s a similar story at Chevron who reported a profit of $3.08c a share, or $6bn, a sharp fall from the $11.62bn a year ago while revenues fell by 29% to $48.9bn.
FX
Currency traders are still trying to figure out what to make of this morning’s move by the Bank of Japan to offer to purchase JGBs at 1% every day through fixed rate operations. While the move seems to create the outcome of effectively raising the current cap by 50bps, Governor Ueda then went on to say that the upper limit of the cap remained at 0.5%, and that they weren’t changing the current parameters. Whichever way you look at this morning’s events it is clear that the Bank of Japan is having to move with the data, which is showing that inflation in Japan is likely to be higher in the short term and that policy needs to adjust to that.
The Japanese yen has been the best performer this week on that basis and is also modestly higher on the day as well.
The pound has managed to hold up reasonably well this week, largely due to the fact that we don’t know what is coming from the Bank of England next week when they look to follow up this week’s 25bps from both the Federal Reserve and the ECB. There is also the fact that unlike the ECB and Federal Reserve, the Bank of England may well have more than 1 rate hike left in its locker.
The terminal rate for the BOE still remains much higher than its peers, and while the pressure has come off rate expectations over the past 2 weeks, the terminal rate is still over 75bps above the current base rate. If the Bank of England is sensible next week, we will probably see a hawkish hike of 25bps ahead of the July CPI numbers which are due 16th August, where future rate expectations could fall further.
Commodities
Despite today’s pullback, crude oil prices look set for their fifth successive weekly gain as a more resilient US economy prompts a more optimistic outlook over global demand, even as US prices slip back from $80 a barrel.
Speculation that Chinese authorities will embark on further policy easing measures has driven Brent prices to their highest levels in over 3 months this week, just shy of $85 a barrel, indicating a tightening market.
After 3 weeks of gains gold prices look set for a pause as uncertainty over whether US yields have peaked, keeps further progress in check. The inability to take out last week’s peaks at $1.987 has seen prices retreat slightly, with US yields finishing the week slightly firmer, despite the likelihood we may have seen the Fed come to the end of its rate hiking cycle.
Volatility
Despite better-than-expected earnings news, shares in telecoms group BT moved lower on Thursday with a big reduction in broadband customers for the quarter weighing. The underlying may have finished off session lows but one day vol stood at 90.91% against 41.28% for the month.
Keeping with corporate news and eBay also saw elevated levels of price action. The company reported after the close on Wednesday and whilst the sell off started in post-hours trade, downside pressures built through Thursday, too. Over the latter part of the week, the stock is down more than 10%, with one day vol printing 62.22% against 36.39% for the month.
Stronger than expected US economic data is weighing on gold prices and CMC’s proprietary basket of gold producing stocks is reflecting this sentiment, too. The US Gold cohort dropped to two and a half week lows on Thursday with one day vol standing at 49.31% against 33.51% for the month.
And in fiat currencies it was the Yen that proved the stand out on Thursday. News that the Bank of Japan would allow more flexibility in government bonds hinted towards a policy tightening agenda, driving meaningful gains for the Yen as a result. Action was most pronounced against the US Dollar with one day vol coming in at 16.98%, well up from the 9.35% recorded over the last month.
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