ECB hawkish pivot pushes European markets to five-week lows

Europe

We’ve seen further weakness in European markets today, with the DAX falling to five-week lows and the FTSE100 to four-week lows, as the fallout from yesterday’s hawkish pivot from the European Central Bank continues to ripple through the market. These concerns have been exacerbated by further hawkish interventions from ECB insiders doubling down on that narrative who suggest the prospect of at least another three times in a row.

The DAX has fallen to its lowest levels in 5 weeks, while the FTSE100 is tracking 4-week lows, as investors come to terms with the prospect of higher inflation and higher rates for longer.

On the day, rising recession concerns prompted declines across the board after November retail sales missed expectations, with non-store retailers underperforming due to Royal Mail strikes impacting on online sales, with Black Friday not offering much of a boost.

Food shopping was the only area that saw any sort of growth, although that hasn’t really helped Ocado which has slipped back sharply and is amongst the worst performers this week.

A sharp rise in UK gilt yields also appears to be weighing on house builders, with the likes of Persimmon, and Taylor Wimpey underperforming, with Rightmove shares also under pressure, over concern around higher mortgage rates.  

On the plus side, banks are outperforming on the back of hopes of better margins, however that comes with the sting of potentially higher provisions for non-performing loans if the economy slips into recession, and underperforms into 2023.

Investors seem unimpressed by the announcement from BT Group that they are looking to merge its global and enterprise units into a single entity in an attempt to save £100m a year.      

US

US markets have continued where they left off yesterday, taking their cues from weakness in European markets, as they look to close lower for the second week in a row.

Adobe shares have edged higher after maintaining its forecast for the new fiscal year. The shares took a dive at the end of Q3 when the company downgraded its Q4 revenue numbers. These came in as expected at $4.53bn yesterday, while profits beat expectations, coming in at $3.60c a share. On guidance Adobe said they expected revenues of $4.6bn to $4.64bn for Q1, while keeping its full estimates unchanged.

Reports are also emerging that Goldman Sachs could be set to cut 4,000 people as it looks to improve its financial performance against the backdrop of a much tougher economic outlook.

Novavax shares have plunged after announcing that it would be offering 6.5m shares at $10 each. The company has been struggling against its stronger peers for some time now. Earlier this week the shares fell after it announced it had cut its vaccine supply to the UK. Coming on the back of repeated delays to its vaccine and the company has struggled to stay relevant in what has been a tough year for the share price.  

FX

The pound is slightly weaker after a disappointing set of November retail sales numbers which saw a decline of -0.4%, missing expectations of a gain of 0.3%, although the October number was revised higher to 0.9%. The latest flash PMIs for December pointed to further weakness in the manufacturing sector, falling to 44.7, however services rebounded to 50, from 48.8, although given the strikes we’ve seen so far this month, this number is likely to fall back when the final numbers are released in January.

The shift in stance on the part of the ECB yesterday has seen a much firmer tone on the part of the euro over the past couple of days.   

Commodities

A surge in covid cases which is now impairing any rebound in the Chinese economy, along with rising concerns that central banks will trigger a sharper global slowdown is weighing on prices as we head into the weekend. Oil prices are still on course to finish the week higher, however softer US data yesterday and rising recession risk are pulling prices off their highs of the week.
The sharp fall below $1,800 an ounce has slightly undermined the bullish narrative that saw prices rise to their highest levels since June earlier this week. The sharp rise in European yields along with the resilience of the US dollar appears to be weighing on the yellow metal and could see it drift back to the lows last week, unless it can recover the $1,800 level quickly.