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European markets start the week on the front foot as energy prices surge

Rising power prices push markets higher

European markets have got off to a positive start to the week, with the energy sector helping to push the FTSE100 back up towards the 7,100 level, with BP and Shell outperforming, as power prices surge across Europe, although it still remains some way short of reversing the losses of last week.

Europe

The DAX is also seeing some decent gains with German carmakers leading the way as Daimler and BMW outperform.

Royal Mail shares are amongst the better performers, rallying from six-month lows despite a weekend report that the UK Post Office had secured a deal with Amazon to handle packages on a click and collect basis.

Since its May peaks, Royal Mail shares have declined over 15% over concerns that the return to normal, and pandemic easing of restrictions would hit its parcel volumes over the rest of the year. This is certainly a valid concern given the decline of 13% seen in Q1, however this concern may well have been overestimated, given that management left full year guidance unchanged in July, while revenues were still over 20% up from 2019 levels.     

Rolls Royce shares have been given a boost after the company announced it was selling its stake in AirTanker Holdings, to Equitix Investment following on from initial reports in July that it, along with Babcock was looking at other options to improve the resilience of its balance sheet. AirTanker is a joint venture with Babcock, Airbus and Thales an aircraft leasing business which supports air to air refuelling for Ministry of Defence

The 23.1% stake generated cash proceeds of £189m, will be used to reduce debt and is expected to complete by the end of Q1 2022.

Babcock has also announced that it has been able to sell its 15.4% stake in the same business, also with Equitix Investment, for the sum of £126m, and will also be used to reduce net debt.  

Associated British Foods share price has been in decline since peaking just above 2,500p in March, despite seeing a stronger then expected recovery in its Primark business, which had seen all of its stores closed over the winter period, and saw big rebound in Q3 when retail revenue more than doubled to £1.6bn, while also reporting that is expects full year profits to be broadly in line with 2019/20 levels.

Today’s Q4 numbers have reinforced that optimism for the full year, with adjusted profits for Primark and the food business expected to exceed previous expectations. The sugar business is also expected to deliver an improved outcome.

Primark sales for H2 are expected to come in at £3.4bn, with operating margins expected to come in at over 10%, however like for like sales in Q4 were 17% lower than they were in 2019, as the pent-up demand seen in the strong Q3 rebound slipped back, while various self-isolation restrictions during Q4 also prompted a slowdown. Once again, the lack of an on-line operation continues to hamper the business, when footfall dips and consumer confidence reduces. Despite the more positive profit guidance the share price has come under pressure, slipping back towards last week’s low, undoubtedly as a consequence of the disappointing performance in Q4.

easyJet's new rights issue shares started trading today. The issue which will see shareholders get 31 new shares for every 47 existing shares at the lower price of 410p, may well look like a good deal, however it’s still a significant dilution, if you don’t take up the rights. Shareholders have until 27th September to commit to the 410p issue; however, it would appear that some aren’t that keen to participate and are dumping their stakes, with the shares lower on the day.    

US

After five days of losses US markets have got off to a positive start this week ahead of some key inflation and consumer spending data which is due over the next few days, although the Nasdaq is underperforming.  

On the companies front, AMC Entertainment is higher after Disney announced that the remainder of its 2021 film releases would be made exclusive to cinemas, before going onto their streaming platform. The release and success of Shang-Chi and the Legend of the Ten Rings over the last weekend appears to have prompted this shift in position.

Walmart shares edged higher after it was reported that it had announced a major partnership with Litecoin in order to allow its customers to use cryptocurrencies as a means of payment, sending the cryptocurrency sharply higher. The report certainly raised a number of questions, not least, why the crypto of choice wasn’t bitcoin. As it turned out the report was completely bogus with Walmart denying the reports, and letting the air out of the Litecoin surge. The report also raised the question as to how such a piece of news could get reported across a number of reputable newswires before being debunked at source. What a shambles!

FX

The US dollar is off its highs of the day but is nonetheless still fairly well supported ahead of tomorrow’s CPI data, which could well see US headline inflation edge above its July levels of 5.4%. The worst performers are the low yielders of the Swiss Franc and the euro.

Commodities

Crude oil prices have continued to edge higher with US supply concerns in the wake of Hurricane Ida still dominating. There had been an expectation that a lot of the damage to the infrastructure caused by the storm wouldn’t take too long to fix. This turns out to be a little wide of the mark, and could well go on for a few weeks more, with 75% of oil output in the Gulf of Mexico yet to restart and another storm on the way.

Natural gas prices have continued to move higher hitting another seven year high.

Slightly softer US 10-year yields are helping to push gold prices back towards the $1 800 level.


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