Early Morning Call: equity markets down while FedEx warns of slowdown

Equity markets in Europe opened the session in the red, following the lead of the US and Asia-Pacific region, as FedEx Corp warned its businesses have neem affected by the global economic slowdown.

Macro-economic overview

As China is still dealing with an ailing property market and the impact of COVID curbs, the country published better-than-expected macroeconomic data. Industrial production increased by 4.2% in August from a year earlier, the fastest pace since March, beating expectations of a 3.8% expansion.

Retail sales rose 5.4% from a year ago, beating forecasts for 3.5% growth, while fixed asset investment grew 5.8% in the first eight months of 2022 from the same period a year earlier, above a forecasted 5.5% rise and up from January-July's growth of 5.7%. This had little impact on the yuan. USD/CNH now trades at a 26-month high.

Reserve Bank of Australia (RBA) governor, Philip Lowe, said overnight that interest rates are closer to normalisation. "At some point, we will obviously not be increasing rates by 50-basis points (bps) at each meeting, and we're getting closer to that point," Lowe told a parliamentary economics committee, adding "we are at 2.35%, so we're getting closer to the range that you think is normal but we're probably still on the low side."

In just five months, the RBA has raised its key cash rate by 225 basis points to a seven-year high.

UK retail sales fell more than expected in August, by 5.4% on a year-on-year (YoY) basis. It is the biggest decline so far this year, as sales fell in all main sectors.

Equities

FedEx shares tanked in extended trading yesterday after a warning that its fiscal first quarter (Q1) results were hit by a fall in global volume and withdrawing its financial forecast.

A week before publishing its fiscal Q1 earnings, FedEx said it expected to post earnings of $3.44 per share, well below analysts’ consensus of $5.17. It said revenue should also fall short of expectations at $23.20 billion.

According to FedEx, the global slowdown accelerated in August, and is expected to continue though the current quarter. So far the group estimates these headwinds to be responsible for a $500 million fall in revenue at FedEx Express, and $300m at FedEx Ground.

FedEx CEO, Raj Subramaniam, said in a statement that "Global volumes declined as macroeconomic trends significantly worsened later in the quarter, both internationally and in the US. We are swiftly addressing these headwinds, but given the speed at which conditions shifted, first quarter results are below our expectations."

FedEx says it will shut some office locations, reduce the number of hours worked, and consolidate some sorting facilities. The warning had a ripple effect on its competitors and retailers.

Another big drag on stocks on Wall Street yesterday was digital media and marketing software firm, Adobe Systems Inc (All Sessions). While it topped the earnings target for its fiscal third quarter (Q3), sales were a bit below expectations. But the real reason it fell was on the news that it is to acquire Figma, a web-first collaborative design platform, for about $20 billion.

Commodities

Gold is on track to post its worst week in two months, after falling yesterday to a 28-month low. The precious metal started falling on Tuesday after US consumer price index (CPI) unexpectedly rose in August, a bearish momentum that could continue until the Federal Open Market Committee (FOMC) meeting next week.

Markets are currently pricing in a 75-basis-point Federal Reserve (Fed) rate hike.

Oil prices are little changed this morning as the market awaits Baker Hughes data. Last week, Baker Hughes total rig count fell by one to 759, due to a fall of the number of oil rigs in operation. The number of producing oil rigs fell by five to 591, while the number of gas rigs rose by four to 168.