European markets falter as NATO pushes back on Russian troop de-escalation claims

Europe

Yesterday’s relief rally on reports that Russian troops were returning to their bases has given way to more caution today, after it turns out that Russian claims don’t appear to being matched by deeds.

While the Russians are saying one thing, NATO and the US are reporting that Russian troop numbers are rising near the Ukraine border, and that no de-escalation appears to be happening, making markets increasingly susceptible to headline risk. And so, the phoney war goes on, as the pullback in stock markets prompts a move into government bonds sending yields into retreat.

We’ve also seen a rebound in the oil price after yesterday’s steep falls and this appears to be helping the energy sector, which acted as a drag on the FTSE100 yesterday, with BP and Shell outperforming. 

While market sentiment is being affected by the shifting sands of market sentiment, macro data   The worst performers have been in the likes of Ocado, Tesco and B&M European Retail after the latest UK inflation report came in at a new 30 year high, as CPI and RPI both came in at new 30-year highs, at 5.5% and 7.8% respectively. With new tax and energy price rises coming in April, in the words of 1980’s pop star Yazz, “the only way is up” for inflation right now.

Having seen quite a bit of volatility in the past couple of days due to the demerger of its coal assets and events on the Ukraine, Russia border, Evraz has slipped back having seen some decent gains over the past couple of days.

Diageo shares are also lower, probably due to a negative read across from this morning’s warning from Heineken alcohol sales could decline due to big increases in input prices. 

US

US markets have opened lower as sentiment continues to get buffeted by headline risk out of Europe, with the latest US retail sales report for January almost becoming a footnote.

These retail numbers showed that, despite weak consumer confidence ,spending rebounded at its fastest rate in 10 months in January, rising by 3.8%, well above expectations of 2%. The biggest gains were in online sales, as well as furniture, autos and building materials as US consumers spent money on improving their homes and upgrading their cars.

Today’s lower open may well also be due to an abundance of caution over the release of the latest Fed minutes, where we could get further clues over policymaker thinking on balance sheet reduction, as well as the thorny topic of 25bps, or a 50bpos rate hike in March. 

With the gradual relaxation of covid restrictions and travel expectations were high that Airbnb would be able to see a return to the types of revenues it saw in 2019. In Q3 revenues had already hit a record level and Q4 managed to surpass that, despite Omicron, sending the shares to 2-month highs.  Q4 revenues came in at $1.53bn, well above expectations of $1.46bn, swinging to a profit of $55m or 8c a share. For Q1 revenue guidance also came in above expectations with the company saying it expects to see $1.41bn to $1.48bn, as more properties become available, and more people go down the Airbnb route for holiday stays.

Gaming company Roblox shares on the other hand have dropped sharply after falling short on Q4 revenue and user growth expectations. This is the problem with having such a high bar, revenues still rose 83% year over year, coming in at $568m, while daily users came in at 49.5m, missing expectations of 50.1m. Losses also came in higher than expected at $0.25c a share. There has been an improvement on daily users for Q1 with 54.7m in January, however investors don’t appear to be in a forgiving mood, with the gaming and Metaverse company getting a bit of a shoeing over its ability to meet revenue targets expectations.

Nvidia gets set to publish its Q4 numbers later today and expects to see a significant improvement on its performance in Q3. In Q3 the company saw decent sales in high spec chips for AI tasks, which pushed revenues in this segment up 55%. The launch of a new suite of chip products called the Omniverse is also expected to drive revenues in this area in coming quarters. For Q4 the company said it expects revenues of $7.4bn, plus or minus 2%, with gross margins of 65.3% to 67%. Profits are expected to come in at $1.22c a share.. 

FX

The pound has edged higher on the day after UK CPI rose to a new 30 year high of 5.5%, while RPI rose to 7.8%. Slightly more worrying, for those looking for signs of a top in price pressures, there was little sign of a slowdown in the more forward-looking PPI numbers which continued to rise as output prices came in at their highest levels since 2008 at 9.9%, although input prices slowed to 13.6%, from 13.8%.

The modest increase in core prices to 4.4% also showed that underlying inflation is still on the rise, and is likely to rise further by April, making it inevitable that we’ll probably see another increase in the base rate next month, when the Bank of England is set to meet next. With markets pricing in the prospect of a base rate of 1% by the summer the only unknown is whether the Bank of England will go for a 25bps move or decide to rip off the band aid and go full 50bps to try and get ahead of events, but also anchor short term inflation expectations.

Commodities

Yesterday’s sell off in crude oil prices has seen a little bit of a rebound, as markets wait to see whether Russian actions about troop withdrawals match their words. So far the evidence looks anything but promising, with talk that troop levels are increasing on the Ukraine border, and not reducing. The latest US inventory data showed a surprise build of 1.12m barrels.

Gold prices, after falling heavily yesterday, have also seen a modest rebound getting an underpinning from increased event risk, along with rebounds in palladium and platinum.

Volatility.

Price action on Russian steelmaker Evraz remains elevated with the underlying share price finding some support yesterday. That was off the news that Moscow appeared to be winding down its troop presence on the Ukrainian border. The stock is no stranger to wide swings in price and with the risk of a Russian invasion still seen as a possibility by many, Evraz may well remain on our radar for a while yet. One day vol sat at 173%, up from a monthly print of 87% but slightly down from the 208% posted on Monday.

Optimism that military conflict can be avoided in Russia served to calm energy markets, at least a little, with crude oil retreating from its test of seven and a half year highs yesterday. Both UK and US crude oil contracts saw price action increase as a result, with one-day vol posting 41.6% and 43.8% respectively against one-month readings of 32.9% and 35.8%.

The idea that fuel prices may now find a degree of stability served to lift equity markets across Europe, helping them reverse some of Monday’s losses. The most notable increase in activity was seen on the smaller Frankfurt bourses with risk-on appetite driving prices. The German Mid 50 saw one-day vol of 47.4% up from a monthly reading of 29.6%.

As for fiat currencies, that troop de-escalation again dominated matters, with the Rouble remaining highly active but leaving USD-RUB to extend losses since the weekend to around 3%. One day vol sat at an elevated 32.9%, but other Eastern European currencies also remained in focus, with geopolitical gains and more upbeat economic news helping lend support.