European markets pause for breath as yields and Oil slip back

Europe

European markets appear to be pausing for breath after the downs and ups at the start of the week, with the DAX and FTSE100 trying to push higher, while the CAC 40 has struggled due to weakness in the luxury sector after a profits warning from LVMH.

Luxury goods brand LVMH has fallen to its lowest levels since December last year after reporting a softening of demand in its Q3 numbers released last night. While revenue saw an increase of 9%, expectations had been for a rise of 11.9%, with sales in its Asia markets falling short of forecasts. Q3 revenues came in at €19.96bn an increase of 1.1%, however there were sharp declines in revenues in the wine and spirits division, which fell 21%, while watches and jewellery revenue fell by 5.3%.

This underwhelming update has seen the likes of Burberry, Richemont and Hermes all slide back as well over concern that this weakness could be a sign of things to come for the sector.

Energy has been a laggard along with oil prices which is weighing on the FTSE100, although it is being helped on the other side of the ledger by resilience in defensives, with the likes of Imperial Brands, BAE Systems and Utilities.

It’s also been a poor day for the construction sector with Howden Joinery and Kingfisher on the slide after sector peer Travis Perkins reported a surprise decline in Q3 revenue of -1.8% and issued a profits warning. 

The key area of weakness was in the building merchant’s business which saw revenues slump by 3.4%, due to discounting on goods and lower raw materials prices, even as volumes slipped by 0.3%. The Toolstation business has managed to outperform, with volumes and revenues both rising. Nonetheless Travis Perkins downgraded their expectations for full year adjusted operating profit to between £175m and £195m.

Next shares are also lower along with the rest of UK retail, with reports circulating that it’s looking to close a deal for Fat Face for around £100m, as it continues to vie with Mike Ashley’s Frasers Group in cementing its position near the top of the general merchandise food chain in UK retail. Fat Face currently sells its brands on the Marks & Spencer website which means any deal with Next will mean that will probably end.

US

US markets opened higher despite PPI inflation unexpectedly popping higher in September. Headline PPI rose by 2.2% while August was revised higher to 2% from 1.6%, with most of the gain driven by higher energy prices. 

Core prices were also a touch firmer rising to 2.7% from 2.5%, serving to push 2-year yields sharply off their lows of the day, even as 10-year yields remained near their lows of the day. As a forward-looking indicator this isn’t encouraging for CPI tomorrow, however for now markets appear to be shrugging it off ahead of the release of tonight’s Fed minutes.

Exxon Mobil shares have slipped back after confirming that it has agreed a deal with Pioneer Natural Resources for $59.5bn, paying $253 a share in the process, giving it a strong position as the one of the major operators in the Permian Basin, giving it a 15% of the regions total output.

All eyes will be on Birkenstock later today as the German shoe manufacturer makes its debut later today, at $46 a share. 

FX

The currency reaction to the unexpected increase in PPI inflation has been interesting in that it hasn’t given a lift to the US dollar, suggesting that markets think it’s likely to be temporary. What we have seen is that short rates have pushed higher, while longer term rates have remained soft.

This appears to suggest that investors think that while another rate rise may well be coming, we’re pretty much near the top in the longer term.

The pound has edged higher despite a sharp decline in gilt yields and Goldman Sachs cutting its UK inflation forecast for 2023 and 2024. On the face of it while it could be construed as a negative for sterling it’s likely to be a good thing for the UK economy, as it could imply that the weak GDP forecast from the IMF yesterday is too pessimistic and once again the UK economy could do better than expected. It certainly wouldn’t be the first time that the IMF has been wrong.  

Commodities

Crude oil prices look set to fall for the second day in a row after their Monday spike higher as concerns about possible disruption to supplies continue to recede, with Israel’s efforts contained for the time being to the Gaza region.

Natural Gas prices appear to have hit a short-term top after 2 days of strong gains, slipping back from 4-month highs as talks resumed between Australian LNG workers and Chevron set to resume tomorrow.

Gold prices have continued to edge higher, against a backdrop of several Fed members who have suggested that rates may well be restrictive enough, and that we might have seen the top in the short term when it comes to rate hikes. 

Volatility

CMC’s proprietary basket of renewable energy stocks continued to find favour on Tuesday, reversing last week’s losses. The key driver here seems to be that fall in bond yields, as debt financing underpins financial models for many operating in this sector, as well as the more obvious energy security question which have resurfaced in the wake of the unfolding situation in Israel. One day vol on the basket sat at 60.33% against 45.54% for the month.

It was comments from the President of the Dallas Federal Reserve that predicated that fall in bond yields, following suggestions that rates in the US had now peaked. That’s offering some relief for the commercial banking sector too as it may help stem the rising number of defaults being seen. As a result, CMC’s basket of US bank stocks also had a good day with the underlying adding around two percent before giving back a little of the upside. In addition, talk of a possible disposal by Truist – one of the larger constituents – served to boost upside further. One day vol on the basket printed 38.54% against 36.05% for the month.

Dollar weakness also played into the hands of Palladium, driving the underlying some four percent higher on the day. The precious metal had been trading around five year lows but again a renewed desire to move away from a reliance on fossil fuels plus better financing terms for green tech businesses could continue to lend support here. One day vol stood at 45.46% against 38.56% for the month.