European stocks end a lacklustre week on the back foot, as Fed, ECB and BoJ loom

Europe

It’s been another quiet day for European markets at the end of a choppy but directionless week that has seen investors attempt to find the next big catalyst to drive the next move. This may come next week when the Federal Reserve, European Central Bank and Bank of Japan all meet to mull their next rate decisions at a time when growth is weak or slowing, and prices remain sticky.  

The FTSE100 has spent all this week trading either side of the 7,600 level, albeit with a slightly negative bias and on course for its 3^rd successive weekly decline, with today’s main movers being Croda International which has seen its shares drop sharply after the company issued a profits warning.

Croda said it expects pre-tax profit to come in between £370m and £400m due to a sharp drop in consumer care sales volumes from the same quarter a year ago due to customer destocking. This trend is expected to continue over the rest of the year, with the effects only likely to be modestly offset by the pass-through effects of higher prices.

House builders are also lower after HSBC temporarily pulled all its mortgage deals to new borrowers due to high demand, while Nationwide announced it was increasing the rates on a range of its products. Taylor Wimpey, Barratt Developments and Persimmon are all on the back foot.  

The likes of EnQuest, Serica Energy and Harbour Energy have edged slightly higher after the UK government confirmed that the energy price levy would continue until 2028, however they did offer the carrot that if average prices for oil and gas fell to, or below $71.40 a barrel and £0.54p a therm for 2 consecutive quarters the measure would revert to 40. There has been no impact on the share prices of BP and Shell even though they are lower on the day, given the low levels of UK profits both companies make.

US

US markets opened mixed with the S&P500 up at 10-month highs, despite a continued rise in yields with the US 2 year yield up again pushing up to 4.6% and 3-month highs, while the Russell 2000 has outperformed this week, helped by a rebound in US regional banks.   

Tesla shares have jumped to an 8-momth high after GM announced they would be following Ford earlier this week in adapting their electric vehicles to Tesla’s supercharge infrastructure. This will have the added benefit for Tesla of adding to its revenue stream as more electric vehicles use the architecture.

Online used car retailer Carvana shares saw a big surge last night after the company revealed it was performing better than expected in Q2, after it updated its forecast for underlying profits for the quarter to positive territory.

DocuSign shares have also jumped on the open after posting Q1 revenues of $661.4m comfortably beating expectations, while profits came in at $0.72c a share. For Q2 the company said it sees revenue of $675m to $679m while also raising its full year revenue forecast to between $2.71bn to $2.73bn.  

FX

We’ve seen a modest pullback in the US dollar this week in the wake of this week’s surprise rate hikes from the Bank of Canada and Reserve Bank of Australia.

The losses for the US dollar this week appear to be down to some position lightening taking place ahead of next week’s Federal Reserve rate meeting, ahead of an expected pause in the US central banks rate hiking cycle.

This week we’ve started to see some evidence that the US economy is exhibiting some weakness in the face of recent rate hikes. Given recent guidance from Fed officials there is an expectation that we may see a skip or pause followed by a July hike. This logic makes little sense given that the limited amount of data that would be available to central bank officials between the two meetings.

The Norwegian Krone has surged today after its core CPI numbers for May jumped sharply from 6.3% to 6.7%, even as its PPI numbers slowed sharply, dropping -23.5% year on year, prompting the question as to what on earth is happening when it comes to prices.

The Japanese yen has slipped back today after Japanese officials played down the idea that we’d see any variance to the current settings of monetary policy at next Friday’s Bank of Japan rate meeting. The Bank of Japan said it still sees the need to monetary stimulus, and that its inflation price goal of 2% is still out of sight. For reference Japanese core inflation is currently at 4.1%, more than double the central banks 2% target.   

Commodities

When Saudi Arabia announced that it was cutting its output by 1m barrels to 9m barrels a day last weekend the immediate reaction was for prices to push higher, with brent hitting a one-month high. The fact that all these gains disappeared almost immediately suggests that the main factor driving prices now isn’t supply but demand, or the lack thereof, with prices set to finish the week lower. This week’s economic data out of China appears to point to a deflationary impulse as well as a weak global economy after a slide in exports, which Saudi Arabia can do very little about.

Natural gas prices have surged over 20% week as the hot weather in Europe fuels demand for power for air conditioning usage.   

Volatility

Shares in Adobe saw elevated levels of price action on Thursday after the company announced that it was to launch an AI tool to select enterprise customers. The underlying stock added almost 5%, driving one day volatility to 67.14% against 46.83% on the month.

Analyst upgrades served to bolster the valuations of both Amazon and Netflix, the two largest constituents in CMC’s proprietary basket of online streaming companies. Stronger gains for smaller play Warner Bros also factored in here, with the basket printing one day vol of 41.02% against 32.86% as a result.

The Nikkei equity index extended Wednesday’s sell off to test lows for the week on Thursday, before market bulls returned for another attempt to push the contract higher. There’s no dispute that the trend remains firmly upward here – the index has advanced around 10% over the last month – but this just seems to be a case of a pause for breath on the way up. One day vol stood at 25.8% against 16.6% for the month.

Oil prices were in focus on Thursday after reports circulated that a deal had been reached between Washington and Tehran on allowing exports to resume from Iran. This was later dismissed, but the overall result was some notable selling in both crude and distillates. RBOB Gasoline prices sold off by more than 7% before recovering around half the losses. One day vol printed 43.45% against 33.58%, whilst activity on CMC’s commodity index of energy contracts followed a similar path with one day vol of 43.99% against a monthly reading of 32.66%..