European markets finish the week on the up, but FTSE lags

Europe

European markets got off to a strong start today, building on yesterday’s US CPI inspired gains, after China announced it was relaxing some of its Covid quarantine restrictions, however the momentum has started to tail off heading into the weekend. The FTSE100 has found itself slipping back with the more defensive areas of the market coming under pressure. Nonetheless it’s still been a strong week for markets generally, with the German DAX closing higher for the sixth week in a row.

It’s hard to escape the feeling that once again markets appear to be getting slightly ahead of themselves, given that the quarantine time in China is still quite long, and that covid infection rates are rising and not decreasing, with Guangzhou, a city of over 15m people, on the brink of a new lockdown.

The best performers have predictably been in basic resources and energy as commodity prices pushed higher, with the likes of Anglo American, Antofagasta, Rio Tinto all showing strong gains, along with the likes of Prudential who do a lot of business in the Greater China region. Despite this the FTSE100 has underperformed, slipping back after failing to gain a foothold above the 7,400 level.

Some of today’s declines have been in the more defensive areas of the market with losses for GSK, falling on the back of a downgrade from UBS, on uncertainty over future levels of its Shingrix vaccine sales.

Imperial Brands is also lower ahead of its full year results next week, down from three-year highs for the second day in a row, on concern over its ability to grow its NGP revenues.    

US

Having seen the best one day move since April 2020, and with bond markets closed for Veteran’s Day, US markets have struggled to push on, with the S&P500 just shy of the 4,000 level and have slipped back heading into the weekend.

The uncertainty in the crypto space is seeing some weakness after FTX filed for Chapter 11 bankruptcy, pulling bitcoin, Ethereum and other coins lower. It has also seen Coinbase and MicroStrategy shares slip back.

On the data front the latest University of Michigan sentiment numbers for November don’t appear to confirm the softer inflation outlook from yesterday’s softer October CPI number. 1 year inflation expectations edged higher to 5.1% from 5% in October, while consumer confidence fell sharply to 54.7 from 59.9.   

FX

The US dollar has continued to come under pressure today, sinking to a two-month low against the Japanese yen, below the 140.00 area, and down over 5% this week. This weakness probably has further to go with a slide to 138.15 initially, and potentially as low as 133.00.

We’re seeing broader weakness across the board for the greenback as markets start to focus on how quickly headline CPI is likely to come down.

The pound has struggled to build on its strong gains from yesterday after the latest Q3 GDP numbers showed the economy contracted by -0.2% in numbers released earlier today. With a budget due next week, as well as October CPI numbers, the outlook for the UK economy still looks bleak, especially with the new energy price cap kicking in last month. The weak economic outlook is also set to be reflected in next week’s retail sales numbers for October, in a week that could well be a tough one for the pound.     

Commodities

Crude oil had a somewhat muted reaction to yesterday’s lower than expected US CPI reading and the slide in the US dollar, however this morning’s reports that China was relaxing quarantine restrictions on inbound travel has had an altogether different effect. Prices of Brent and WTI both lurched higher in the aftermath of the announcement, despite the fact that Covid cases are still on the increase there. While the tweak to covid policy is a welcome positive step it falls well short of an economic reopening, and as such prices are still below this week’s highs.

Copper prices, on the other hand, have hit their highest levels since June, and are also closing in on the 200-day SMA, in anticipation of a pickup in economic activity heading into 2023.

Gold prices have continued to hold up well after the rally of yesterday, and could well see a return to $1,800 an ounce next week, when US bond markets reopen, after today’s Veteran’s Day holiday.