European markets have continued to struggle today with the FTSE100 and DAX both dropping below yesterday’s lows, after a truly awful German factory orders number for July saw output plunge by -11.7%.
While this number does tend to be volatile, the extent of the drop was astonishing being only matched by the declines seen in the aftermath of the Covid lockdowns in April 2020.
Europe
At a time when the German economy is clearly on its knees, it somewhat beggars’ belief that you have ECB officials making the case for further rate hikes, with Klaas Knot of the Netherlands Central Bank saying that markets were overestimating the likelihood of an ECB pause next week.
To add to the problems facing central banks the recent rise in oil prices is also acting as a headwind, thus making it much more difficult to find the optimal policy setting that won’t make the current situation even worse.
The luxury sector is the worst performing sector in Europe today after Richemont chairman Johann Rupert said that higher prices were now starting to impact the spending patterns of richer consumers, prompting weakness in the likes Hermes. LVMH and Burberry.
AstraZeneca shares have slipped back after the US FDA delayed the approval of its new Ultomiris drug, requesting a more detailed plan risk mitigation plan in its delivery to patients, who test positive for an antibody called anti-aquaporin 4.
There was little in the way of surprises from Barratt Developments full year results today, with home completions down 3.9% at 17,206, although revenues rose 1% to £5.32bn. On a statutory basis profit before tax came in at £705.1m, a rise of 9.8%, helped by a 1% rise in operating margins of 13.3%, as the housebuilder was able to pass on higher prices. On the outlook the tone was more downbeat, sending the share price lower as Barratt forecast that total home completions for 2024 would be lower at between 13,250, and 14,250, with the company citing concerns over short-term demand due to higher interest rates. This cautious outlook has weighed on its peers with Persimmon also lower.
Darktrace appears to have drawn a line under its recent woes, after short seller Quintessential Capital Management expressing scepticism over the validity of its financial statements, while also taking an active short position. To combat these accusations Darktrace contracted Ernst & Young to review its finances to draw a line through the unwelcome speculation over its accounting practices. In July the company announced that the review had been completed and that nothing in any of its previous financial statements remained unchanged, and that the financial statements accurately reflected the firm’s financial position.
Today’s full year results have seen the company report a 31.3% rise in revenue to $545.4m, boosting pre-tax profits to $41m. On guidance for 2024 revised its guidance for EBITDA to between 17% and 19%, while keeping its revenue growth target unchanged at 23%, with the shares sliding back on the lower EBITDA guidance.
US
US markets took their cues from today’s weakness in European markets, opening lower as concerns over sticky inflation and low growth weighed on sentiment. As the next central bank rate meeting from the Federal Reserve in two weeks’ time looms there is little prospect that the Fed will get anywhere close to cutting rates if the economic numbers continue to move in the opposite direction to the rest of Europe. Today’s August ISM services report saw economic activity rise to its highest level since February, while prices paid also jumped sharply to their highest level since April.
The resulting rise in yields saw the Nasdaq 100 drop sharply to one-week lows, closely followed by the S&P500, ahead of tonight’s latest Beige Book survey which could well reinforce the prospect of a pause in a fortnight’s time.
The tech sector has borne the brunt of the sell-off in the wake of this afternoon’s economic numbers, with Tesla, Apple and Nvidia leading the Nasdaq 100 lower.
FX
The US dollar had been trading lower initially until this afternoon’s hotter than expected ISM services report hit the wires, and then it popped higher to fresh 5-month highs, as economic activity jumped to its highest level since February and prices paid also rose sharply. The greenback also gained against the Japanese yen despite a warning from Japan’s minister of finance Masata Kanda that moves to stem the currency’s decline could be looming, sending traders into intervention watch mode, after the currency hit its lowest levels this year yesterday.
The last time the Bank of Japan intervened to buy the yen was late last year in the wake of the currency moving beyond the 150.00 level. This is likely to be a key level if today’s verbal warning shots don’t do the trick in stemming the yen’s decline.
The pound had already been under pressure against the US dollar even before today’s hotter than expected US ISM services report, after Bank of England governor Andrew Bailey had commented that no decision had been made over a September rate rise in comments to MPs in Parliament.
The Bank of Canada kept interest rates unchanged at 5% as expected, while saying it remained ready to act further if required.
Commodities
Crude oil prices have trod water for most of today after yesterday’s surge to 10-month highs on the news that OPEC+ had agreed to keep the production caps agreed in July in place until the end of the year. While the line of least resistance appears to be higher due to the tight grip OPEC+ has on supplies, concerns about the European and Chinese recovery are serving to temper some of the upside.
Gold prices have continued to slip back, falling to one-week lows, over concerns that stickier inflation will keep interest rates higher for longer keeping upward pressure on the US dollar, with the downtrend that has been in place since May remaining intact.
Volatility.
News that Airbnb was to be included in the S&P500 gave the underlying stock a significant lift on Tuesday, advancing around 8.5% and helping recover most of the losses posted last month. The result was one day vol on the $90 billion company being recorded at 71.98% against 46.73% for the month.
Cannabis stocks found support last week off the back of rising hopes that the drug would be rescheduled at a federal level in the US. That continued again yesterday, and CMC’s proprietary basket of licensed growers added a further 10% in the first few minutes of trade. Gains since the middle of last week are around 33%, whilst one day vol printed 174.92% against 109.87% for the month.
News that Russia and Saudi Arabia would both extend oil production cuts saw crude prices power higher. Brent advanced meaningfully beyond the $90 mark for the first time this year before giving back some of those gains, with one day vol of 34.58% against 24.46% for the month. The West Texas Intermediate contract wasn’t far behind in terms of price action either with daily vol of 35.27% against 26.14% on the month.
RBOB Gasoline also spiked in the short term although gains proved unsustainable, and prices ended broadly flat on the day. EIA data due on Thursday could provide some further direction here, but volatility was elevated as a result, coming in at 39.41% on the day and 31.81% on the month.
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