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Risk Easing Today

Softer tone to risk early on Wednesday with European indices in the red at the open following a broadly tough session in Asia overnight. Some of the rally from the better-than-expected China GDP data on Tuesday seemed to be unwound and risk was generally off the boil early doors with the FTSE 100 down around a third of a percent at 7,890 – but after a strong run in the last few sessions. Mixed earnings reports and steady-ish Treasury yields offer markets with something of a moment of pause and thought. The S&P 500 is running into the Feb highs around 4,150, around +15% off the lows, and next couple of weeks look key as to whether this is breached and the Aug ’22 highs around 4,300 get attacked.

 

No Vacation for Inflation

UK inflation figures present an ongoing headache for the Bank of England. CPI inflation remained in double-digit territory in March, down to 10.1% from 10.4% in February, but above the 9.8% expected. This puts it at odds with most peers, with modest disinflation – at least in terms of the headline rate – in places like the US and Europe. Core inflation remains a lot stickier everywhere and the UK is no exception – holding at 6.2% last month. You have to question whether the BoE’s complacency and lack of urgency compared to the ECB and Fed has left the UK with worse inflation than the Eurozone or US. There has not been a ‘whatever it takes’ mantra – partly because they know that the property market is so vulnerable as millions of fixed-rate deals roll off in the coming months. But we cannot live with 10% inflation for long without big political ramifications.  

 

UK Bond Yields Up  

Double-digit UK inflation lifted bond yields across the spectrum with the US 2yr up about 5bps to 4.25% and the 10yr up a similar margin to 3.60%. Higher Treasury yields boosted the greenback and sterling rose with gilt yields reacting to the sticky inflation figures. GBPUSD rallied from 1.2410 to around 1.24680. The dollar caught a bid to see DXY push up to 101.70 before it gave up the gains to retreat back to 101.50. Gold took a knock as yields rose, crude is softer with risk appetite suppressed.  

 

US Earnings in Full Swing

Meanwhile a deluge of earnings from Wall Street is keeping investors on their toes a bit – the S&P 500 traded a 30pt range yesterday and finished flat with the Dow Jones and Nasdaq also steady for the session.  

First up Netflix (NFLX), which was mixed as it beat forecasts for headline earnings but guided lighter. It also announced a delay to a crackdown on password sharing. It’s not seen much trading down by consumers where the cheaper ad-supported service has been rolled out, which is encouraging. Shares dipped 10% after-hours before paring losses.  

Goldman Sachs (GS) also mixed, net income down almost a fifth with a big decline in dealmaking. Investment banking revenue was down 16% and advisory fees down 27%. Fixed-income trading revenue – so strong elsewhere on Wall Street in the last quarter - declined 17%. But...this was the third best quarter ever in FICC and comparisons with last year and probably too tough to even mention. Equities trading was better, and it sold a layer of its $4 billion Marcus loan book, creating a $440 million reserve release. Profits beat expectations but revenues were down 19% on the year. Net interest income down 14% and missed expectations.  

Bank of America beat with profits up 15% to $8.2bn... very strong sales and trading revenues. Bad loans lowest in years and net interest income was up 25%.  

United Airlines – softish first quarter but guidance is better. The company expects adjusted earnings per share of $3.50 to $4 in the second quarter and for revenues to rise by 14% to 16% from last year, with capacity up 18.5%. On a positive note, revenue per available seat mile rose 22% in Q1 and is set to improve further.  

Tesla – due to report Q1 results today, yesterday cut US prices for a sixth time this year. Pricing of the Model 3 is now –11% lower, whilst the Model Y is more than 20% lower than at the start of the year after a series of price cuts. All these price cuts are bound to show up in margins. Tesla is expected to report adjusted net income of $3 billion — $1bn less than last quarter and $700 million less than a year ago. It's expected to report $23.37bn billion in revenue – down slightly from the $24.32mn the company reported in Q4, but up almost 25% year-over-year. 

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