European markets struggle for gains as China stimulus boost hopes fade

Europe

Markets in Europe initially started the day slightly higher on reports that Chinese authorities are looking at a large-scale stimulus plan to help stem recent declines in economic activity, as well as the stock market.

Unfortunately, the gains haven’t lasted due to the narrow scope of the reported stimulus which appears to be geared more towards the stock market, rather than the economy itself.

Nonetheless the basic resource sector has seen an uptick on the back of a rebound in copper prices, with Glencore rebounding from 18-month lows, and Rio Tinto also rebounding. 

It’s also been a positive day for retailers, helped by a solid trading update from Associated British Foods. Coming in the wake of recent positive updates from Next and Marks and Spencer, Primark owner AB Foods had a lot to live up to with its own quarterly trading update today and it appears to have delivered with a strong performance across most of its business areas.

Group revenues in Q1 were higher by 5.4% at £6.89bn, driven by a 7.9% increase in its Primark business which saw revenues of £3.37bn, despite a slow start to the quarter which was down to unseasonably warm weather. On the downside the agriculture business struggled with a -10.8% decline in sales to £572m, however this was more than offset by a 13% increase in its sugar business which came in at £825m. AB Foods management went on to say that they feel more confident that they will be able to deliver improvements in operating margins, which should offset any additional costs caused by supply concerns from Red Sea disruption. 

Boohoo shares are also higher after reporting that current trading is in line with expectations.

There’s been little in the way of reaction to house builder Crest Nicholson after reporting a 28% decline in full year revenues of £657.5m and profit before tax of £41.4m, a hefty fall from last year’s £137.8m. The profit numbers were weighed down by a £13m exceptional charge in relation to a legal claim over fire damage to an apartment block which was damaged in 2021. Other charges included an £11.3m charge related to build cost inflation.

The weaker housing market meant that completions fell to 2,020 from 2,734, with management keen to put a disappointing year behind them and focus on a positive medium-term outlook.

US

US markets opened cautiously higher as it looks to post its 3rd successive day of gains with company earnings taking centre stage.

Early movers have included United Airlines after reporting Q4 revenues of $13.6bn and a profit of $2 a share, both of which were better than expected. The airline went on to say that the grounding of its Boeing 737 MAX planes would mean that it will slip to a Q1 loss of between $0.35 and $0.85 a share. Despite this slow start the airline still thinks it will be able to generate 2024 profits of between $9 and $11 a share. American Airlines and Southwest Airlines are also higher, despite Southwest agreeing a new pay deal with its pilots which would see pilot pay rise by 50% over the next 5-years.

Oilfield services provider Halliburton is also higher after posting Q4 profits of $0.86 a share, on revenues of $5.74bn, while boosting the dividend to 17c a share.

The slide in Bitcoin is taking its toll on the likes of Coinbase and MicroStrategy, although Coinbase is also being weighed down by a downgrade from JPMorgan.

Netflix is due to reports its Q4 numbers after the closing bell, bringing down the curtain on a year that has seen it see off its closest competitors with strong gains in subscribers as well as in revenues over the past 12 months. Today the company announced its first venture into live sports paying $5bn for Wrestling for a 10-year deal.

While the likes of Disney and Amazon have struggled for traction on subscriber numbers Netflix has managed to pull further ahead as the number 1 streaming platform. In Q3 Netflix said it expected to match the 8m new subscribers in its Q4 numbers, with the ad-based tier proving to be a successful strategy in terms of keeping its market share. Markets expect to see 8.9m new subscribers pushing total subscribers to 256m in today’s numbers, with revenues expected to come in at $8.7bn. Profits are expected to come in at $2.15c a share, a big increase on the $0.12c a share from the same quarter last year, due to lower spend on content, which in turn has helped improve cashflow. One other bonus is that the penny finally appears to have dropped that they need to adopt an FX hedging program given that 60% of their revenue is non-US dollar based and is likely to increase over time.    

FX

The US dollar is slightly firmer on the back of an uptick in yields, except for the commodity currencies which are outperforming with the Australian and New Zealand dollar trying to eke out gains.

While there were no surprises that the Bank of Japan left monetary policy unchanged, comments from central bank governor Ueda that the committee would look to move away from negative rates as inflation moves back to target, helped to briefly boost the Japanese currency.

There was also good news for the pound after public sector borrowing slowed sharply in December to £7.8bn with lower borrowing costs and increased tax receipts helped to boost revenues during the month. With January usually seeing a surplus the government looks set to the overall deficit come in well below OBR forecasts for 2023/24, there could be scope for a modest fiscal stimulus in the form of tax cuts in the upcoming March budget.

Commodities

Gold prices appear to be finding a short-term base at the $2,000 an ounce area, although recent rebounds appear to be getting shallower, which raises the prospect of further weakness if central banks continue to push back on market expectations of rate cuts. A weaker US dollar is also helping to provide a short-term lift.

With the Bank of Japan indicating that it could be on course to move away from its current negative rate policy the focus over the next few days is set to be on what the ECB says later this week, and more importantly the Federal Reserve next week, when it comes to timelines on potential rate cut paths.

Despite further air strikes on Houthi targets in Yemen, oil prices have slipped back from one-week highs with the direction of prices very much determined by geopolitical concerns on the one hand and demand concerns on the other. Since December prices have been reasonably stable, stuck in a range between $70 and $80 a barrel, with concerns over slowing demand capping the upside against a backdrop of record US production that is squeezing the market share of OPEC+ suppliers.   

Volatility

Silver prices started the week on the back foot as softer economic data out of China and that that delayed prospect of the Federal Reserve cutting rates combined to take a toll. The underlying fell by more than 2.5% during Monday’s trade, testing lows not seen since last November as a result. Some buying support did appear as Asian markets reopened, with one day volatility standing at 23.97% against 22.88% for the month.

Hong Kong listed equities remain under pressure, driving the Hang Seng index ever closer to a re-test of those October 2022 lows. Weak sentiment out of China as well as those persistently high US rates are combining to create a perfect storm and opinion is now building that fresh stimulus measures from Beijing will be necessary to stem the sell-off. One day vol on the Hang Seng printed 31.24% against 24.62% for the month.

At the stock specific level, it was AMD that proved to be a standout, with a degree of profit taking being seen after new all-time highs were printed. There’s some concern on Wall Street that a select number of stocks have overheated significantly of late and when investors do look to redeploy capital, this cohort could find itself in the cross hairs. That said, with AMD up more than 20% since the start of the year, this concept of potential mis valuation is easy to illustrate. One day vol stood at 96.42% against 62.2% for the month.