Today's Markets: Cautious trade ahead of major central bank fortnight

The latest from world markets and in companies news

December 5, 2022

Friday's US payrolls report adds to intrigue
Inflation could be elevated for longer
Oil market watching effect of Russian price cap

Good news or bad news... markets are in a place now where everyone is trying to guess whether good news on the economy is good – soft landing – or bad – inflation stickier and hikes going on for longer. So, there was a lot to digest in Friday’s payrolls report, which blew past expectations. More important than the headline jump in jobs of 263k was the wage growth shock. Average hourly earnings rose 0.6 per cent for the month, vs an expected +0.3 per cent gain, and 5.1 per cent year-on-year vs the 4.6 per cent expectation. The S&P 500 closed a touch in the red but well off the lows of the day.

There are still over 10m job vacancies in the US, so it’s not surprising that wages are rising fast. A massive shortage of labour does not equal a situation where inflation comes down quickly. None of this is transitory – we are in a new inflation paradigm. We now enter the Fed blackout period ahead of next week’s decision, which Jay Powell indicated could be to slow the pace of rate hikes by raising 50bps. Looking ahead to today the ISM Services Index for November is expected at 53.7, while factory orders are seen at +0.7 per cent but the main event this week is the PPI data on Friday.

Minutes from the Riksbank this morning are interesting – the CB saying it would not be surprised if need to raise rates more, risk that high inflation becomes embedded… I think we are already there. It’s not transitory.

Treasury yields have trended lower in recent weeks as markets trim expectations for the pace of hikes by the Fed. The 10yr sits just above 3.5 per cent for now and this will be important for the dollar trade. Majors have recovered a good deal of ground, with both sterling and the euro blowing through their 200-day moving averages last week. USDJPY sits on key 200-day support at 135 now. With little to go on until the PPI report on December 9th, dollar weakness may be the focus this week with technicals not looking great. Sentiment has changed and the tide is now going against the greenback.

Companies

Vodafone boss resigns

Vodafone (VOD) chief executive Nick Read has resigned after four years in the job, after the telecoms giant downgraded its full-year profit and cash flow guidance last month. CFO Margherita Della Valle will take over as interim boss once Read leaves at the end of December.

In its interim results last month, the company blamed its poor showing on the underperformance of Germany, its largest and highest-margin market. Meanwhile, inflation pushed up free cash outflow to €3.2bn (£2.8bn) from €1bn a year earlier. The telecommunications company is struggling with increased costs and investors have not responded with confidence - in the past six months its share price has fallen a quarter. AS

Read the full story here

Glencore to hand DRC $180mn for “any alleged acts of corruption”

Mining and trading giant Glencore (GLEN) became a major producer of copper and cobalt in the Democratic Republic of Congo through deals with the former government, its cronies and Dan Gertler, who “amassed [a] fortune through hundreds of millions of dollars’ worth of opaque and corrupt mining and oil deals in the DRC”, according to the US government.

Now, it has agreed a payout deal with the DRC government that will cover the company for “all present and future claims arising from any alleged acts of corruption by the Glencore group in the DRC between 2007 and 2018”.

The $180mn (£147mn) payment takes its 2022 corruption and bribery penalties to almost $1.7bn, following deals with US, UK and Brazilian authorities. “Glencore is a long-standing investor in the DRC and is pleased to have reached this agreement to address the consequences of its past conduct,” said chair Kalidas Madhavpeddi. Glencore’s copper and cobalt business is one of the key planks of its mining division - the interim cash profit this year was $3.3bn. The cobalt price has also soared in recent years as carmakers look to get their hands on supply for lithium-ion batteries. AH

AG Barr boosted by acquisition

Irn-Bru purveyor AG Barr (BAG) has bought drinks business Boost, which sells energy, sport, and protein beverages, for an initial outlay of £20mn in cash. The company said that this would help with earnings per share, though overall operating margin would be impacted in the short-term. Further consideration of up to £12mn will be due, depending on Boost’s financial performance. Boost posted £42mn in revenue and £2mn in pre-tax profits in 2021.

Peel Hunt analysts are bullish on the deal. They said that “we see significant opportunity for the company to find synergies, and the group now has another brand in a category that continues to grow”. AG Barr shares were up by 2 per cent in early trading. CA

De La Rue chair survives vote

The chair of banknote manufacturer De La Rue (DLAR) will remain in post, after an attempt to oust him failed.

Activist investor Crystal Amber, which has a 10 per cent stake in De La Rue, called on Kevin Loosemore to resign in October. However, at a shareholder vote on Friday afternoon, 83 per cent of votes were cast in favour of Loosemore continuing as a director of the company and chair of the board.

De La Rue recently downgraded its profit guidance for the third time this year, warning of a “subdued” currency market and supply problems in the authentication division. JS

Avon sells Kentucky assets

Avon Protection (AVON) has sold the assets of one of its body armour factories in Lexington, Kentucky, for a “modest cash consideration”.

The assets are part of the body armour plates business that is currently being wound down after failing US military tests. They are being sold to CoorsTek, which is a supplier of advanced ceramic materials to the aerospace and defence industry.

The deal is expected to complete in the second half of its 2023 financial year, once Avon has completed existing contractual obligations with customers.

Avon Protection’s executive chair Bruce Thompson said the deal “provides a future for the facility and the team based there”, while allowing it to concentrate on its core business of making head protection and respiratory systems.

Avon’s shares were up 4 per cent in early trading, narrowing their year-to-date loss to under 5 per cent. However, they remain 77 per cent below their December 2020 peak of 4,650p a share. MF

Currys ditches Royal Mail

Electrical retailer Currys (CURY) has stopped using Royal Mail “for now”, as postal workers prepare for six days of strikes this month.

Currys’ chief executive Alex Baldock told the BBC that there are “relatively few smaller parcels that we distribute through Royal Mail, [and] they are easily switchable to another provider”

Members of the Communication Workers Union have already held 12 days of strike action this year, and further walkouts are due to take place on 9, 11, 14, 15, 23 and 24 December.

Royal Mail reported a £219mn operating loss in the six months to 25 September 2022, and management is insistent that it needs to cut 5,000 full-time roles by next spring. The performance of courier’s parent company, International Distributions Services (IDS), has been bolstered by the strength of its European parcels business. JS

Chinese stocks rallied despite a weaker Caixin services PMI as investors looked at signs the authorities are easing restrictions. The Hang Seng jumped more than 4 per cent, with more timid gains on the mainland. It looks like Beijing is moving at a faster pace to ending its zero Covid approach than we’d thought before. European equities were mixed at the open ahead of a pretty sparse week for data, with basic resources up the most, food & beverage down. Christine Lagarde speaks twice this week though ahead of the European Central Bank’s blackout period – will she signal a 50bps is coming next week after data last week show inflation cooled unexpectedly? Caution around the next week’s huge central bank schedule (Bank of England in addition to the Fed and ECB) may make trading difficult – I don’t think we see much by way of direction until those meetings are cleared out of the way.

This week sees the Reserve Bank of Australia and Bank of Canada in action. After downshifting to 25bps in October, markets expect another quarter-point hike tonight. The BoC has hiked rates by 350bps since March, making it one of the most aggressive rate hike cycles. BoC governor Macklem has said the central bank is nearing the end of its tightening cycle but has also stressed that more hikes are required to slow inflation and has not ruled out another oversized hike. Markets expect the rate to reach 4.25 per cent next year and stay there. The question is whether the BoC opts for 25bps this week or a final 50bps to finish the year.

As the G7/EU oil price cap of $60 on seaborne Russian crude kicks in, OPEC and allies chose to roll over current production quotas but said they would not hesitate to adjust output to stabilise the market. Russia’s deputy PM Alexander Novak said Moscow will not export oil to countries participating in the price cap, even if that means they need to cut output. Crude gapped higher at the open last night but has been falling throughout the Asian session with spot Brent at $85.80.

Neil Wilson is the Chief Market Analyst at Finalto