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After four weeks of gains, European markets appear to have run out of puff this week, spooked in some part perhaps by the big jumps in inflation we’ve seen in UK CPI this week, as well as this morning’s eye-watering surge in German PPI for July.
This has been another week that has seen European and UK gas prices trade at record highs, and the penny appears to have dropped that central banks’ are likely to have to go much harder on rates if they are to have any chance of getting on top of the inflation genie.
The FTSE100 is outperforming largely due to the weakness of the pound which is helping the big US dollar earners on the index, as well as a strong showing from the more defensive areas of the index, notably health care and GSK and AstraZeneca.
With Just Eat shares down at 5-year lows and down over 80% from their October peaks last year the air has been slowly coming out of the online delivery sector, as higher costs and more competition eat into its margins. In April the company announced that it was considering offloading its US GrubHub business, less than a year after completing the deal for the price tag of £5.8bn.
So far there doesn’t appear to have been much in the way of progress on this front, although they have bitten the bullet on it by taking a €3bn write down on it earlier this month.
Today the company announced it had agreed a deal to sell its stake in Latin American online portal iFood to Prosus for an initial €1.5bn, as it looks to bolster its balance sheet further sending the shares sharply higher, while the company also reaffirmed its full year guidance.
It looks like the end is in sight for Cineworld after the shares imploded again today on a Wall Street Journal report that US management are in talks to file for Chapter 11 bankruptcy in a matter of weeks. In light of this week’s announcement about its finances, this isn’t too surprising. It was clear something drastic needs to be done given its high debt levels, and in the absence of further leeway on the part of its creditors an asset sale could well be the next way to go, if bankruptcy is to be avoided.
US
US markets have taken their cues from the weaker European session, opening lower as concerns about the global economic outlook prompt profit taking after several weeks of gains. There still seems to be a great deal of uncertainty about the prospect of a Fed pivot and whether we’ll see one in the next few months. Given that we have Jackson Hole next week, and US policymakers have leant to the hawkish side in comments made this week, we could be starting to see some evidence of risk being taken off the table.
Bed Bath and Beyond shares have fallen again today, after the GameStop chairman Ryan Cohen sold out of all of his stake that prompted the big short squeeze in the first place. GameStop shares have also slipped back as the recent enthusiasm for meme stocks that we’ve seen this month continues to deteriorate.
Agricultural machinery company Deere and Co has seen its shares slip back after revising its full year revenue outlook slightly lower. Q3 revenues rose to $14.1bn, comfortably beating estimates of $12.9bn. Profits came in below forecasts at $6.16c a share, with the company citing disruptions in supply chains, and higher costs. This has put downward pressure on operating margins, with most of the weakness in the small agriculture and turf division. Consequently, Deere has downgraded the upper end of expectations for full year income to between $7bn to $7.2bn, from $7bn to $7.4bn.
The slide in bitcoin and other crypto assets is also seeing the likes of Coinbase, MicroStrategy, and Riot Blockchain all come under selling pressure.
FX
The US dollar has swept all before it this week with strong gains across the board, as currency markets start to price in the prospect that the Federal Reserve is unlikely to soft pedal when it comes to raising rates heading into the end of the year.
This message doesn’t appear to be cutting through when it comes to equity markets, but at some point, it will, probably at Jackson Hole next week when Fed chair Jay Powell gives his keynote speech.
In the meantime, the US dollar is benefitting from the fact it has more headroom to raise rates than its peers, given its economy is in better shape than most of its peers.
The pound has continued to look weak, sliding further below the 1.2000 level against the US dollar as UK consumer confidence fell to a new record low in August. On the plus side retail sales in July unexpectedly rose by 0.3%, as consumers went out and bought items to deal with the heatwave sweeping across the country, while lower petrol prices also helped. This could well be as good as it gets with gas prices already at or close to record highs.
The euro is also looking heavy again, slipping back towards parity, after German PPI hit a new record high of 37.2% in July, confounding forecasts of a fall to 31.8%, and will increase the pressure on the European Central Bank to hike rates when they meet next month.
Commodities
While crude oil prices have recovered from the six-month lows, they still look set to close the week lower as concerns over demand destruction and a stronger US dollar keep a lid on the upside.
Natural gas prices have no such concerns, with European and UK prices trading at record highs, as European countries look to build up storage capacity as we head into the autumn and winter months.
Gold prices look set to close lower for the fifth day in a row as a combination of higher yields and a stronger US dollar push it to its lowest levels this month.
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