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youp until this afternoon’s US CPI figure, everything was going so well, with European markets initially picking up where they left off yesterday, trading at two-week highs, despite another sharp deterioration in the latest survey of German and European ZEW expectations for September, with both indicators falling further below their March 2020 pandemic lows.
Europe
The pessimism around German businesses is fueled by worries about the possibility of energy shortages, which is driving down orders, production and exports.
The initial weakness in the US dollar this week was fueled by the belief that the peak of inflation may be behind us. That may be true, and the current US CPI numbers don’t change that narrative, as we still saw a modest decline to 8.3%, but rising core prices mean inflation will probably be much more rigid than perhaps the markets had been. price, and helps explain this afternoon’s sharp reversal, as the DAX and FTSE100 both pulled back sharply.
This means that while the narrative of peak inflation may well still hold, bringing it down from these levels is likely to be a much tougher battle, requiring more aggressive rate hikes to continue in the months ahead. , starting with 75 basis points next week.
Judging by the negative market reaction today, that narrative was not the one being valued, with US 2-year yields hitting their highest levels since 2007, the surging US dollar and equity markets dropping their gains and suddenly slipping into negative territory.
It was another bad day for Consumer Discretionary, after the strong gains of the past few days, we saw further weakness today after the latest Kantor Grocery figures showed food inflation rising 12 .4% in August, adding up to £571 to the annual food bill.
With Ocado also warning that its fourth quarter numbers were likely to be hit by rising energy costs and dry ice, food retail stocks gave back some of yesterday’s gains, sending shares of Ocado down more than 10% on the day, while Tesco, Sainsbury’s and Marks & Spencer also fell.
British drinks company Fevertree saw its shares soar after the company reported a 14% rise in first-half revenue to £160.9m, although gross margins fell to 37.4 %, reducing gross profits by 4%. In July, the company warned that rising glass costs could impact its gross margins by as much as 670 basis points. Despite this, shares have rallied strongly, with the company maintaining its guidance for full-year revenue of £355-365m and EBITDA of £37.5-45m.
WE
US markets were looking to open higher until the release of the latest CPI inflation figures showed that while inflation slowed in August to 8.3% from 8.5%, we saw an unexpected bigger than expected rise in the core CPI, from 5.9% to 6.3%. , which saw any positive opening potential wiped out in one fell swoop.
The sharp rise in underlying prices would seem to suggest that inflation is likely to be much more sticky in the coming months than markets originally hoped, adding to the risk that the Federal Reserve will not only be much more aggressive on rising rates, but keep those rates higher for longer.
It is certainly not a number that will satisfy Fed officials and it will simply serve to reinforce Powell’s message that the Fed will continue until there is clear evidence that inflation is on a trajectory. sustainable downward. This number doesn’t do that and helps explain the outsized reaction today in stocks, yields and the US dollar.
The resulting surge in US 2-year yields saw the Nasdaq 100 lead the way lower, led by companies like Meta Platforms, which are among the worst performers on both the Nasdaq 100 and S&P500.
Stocks exposed to Bitcoin are also crushed as the cryptocurrency falls back towards the $20,000 level, after hitting a 3-week high earlier in the day. Coinbase is lower, as are Riot Blockchain and MicroStrategy.
Effects
The pound had a strong start to the day, moving well above the 1.1700 zone after the latest payroll figures saw average earnings including bonuses rise 5.5% in July, while the unemployment rate fell to its lowest level since 1974 at 3.6%.
More disappointingly, the fall in unemployment also coincided with an increase in the number of long-term sick people, which reached 21.7% and a 6-year high. Vacancy rates nonetheless remained high, despite a modest decline from 34,000 to 1.3 million. So far so good, but the warmer-than-expected US CPI reading saw those sterling gains quickly tumble, as the US dollar rebounded in anticipation of a rate hike nearly nailed to 75 basis points next week, and then it’s a question of what comes after that?
The euro also fell sharply in the wake of this afternoon’s US inflation data as markets priced the near certainty of 75 basis points next week, with the prospect of more aggressive mores thereafter. .
Goods
Crude Oil prices fell sharply from their intraday highs on the heels of today’s US CPI data as the rebound in the US Dollar led to a sharp retreat towards the day’s lows.
The surge in the US Dollar and yields in the wake of today’s US CPI figures saw gold prices reverse sharply, dropping briefly below $1,700, after hitting their highs. high levels this month only yesterday.
Volatility
The Euro has seen high levels of price action against many currencies with further gains seen at the start of the new week. These proved to be somewhat fleeting, however, with comments from the ECB reiterating that it would undertake expansionary fiscal policies in a bid to offset the rate hike ultimately. Against the greenback, the daily vol rose to 12.87% from 10.49% on the month, slightly more exaggerated levels were posted against the Canadian dollar of 11% from 8.36%, with the theme also repeated against the yen and the Swiss franc.
A big jump in soybean prices in the latter part of yesterday’s trade lifted action in the commodity. This follows the U.S. Department of Agriculture cutting crop estimates to significantly below analysts’ forecasts. Daily volatility rose to 49.22% against 32.23% over the month.
Crypto volatility remains elevated across the asset class, with Bitcoin extending its recent streak of gains. BTC/USD theft rose 55.69% for the day from 44.78% on the month, while the avalanche against the US Dollar printed 93.39% on the day and 76.52% on the month.
And finally, European banks had another strong day on Monday, with CMC’s proprietary basket for the sector breaking off mid-August highs and pricing in a return to levels not seen since the start of the summer. Daily volume here came in at 38.16%, just ahead of the monthly print of 37.12%.
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