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Rolls-Royce boosts the FTSE 100 but ex-divs drag

Rolls-Royce engineer overseeing a big jet engine

European markets have seen a broadly positive session today with the DAX on course to post its highest close in over a year, while the FTSE 100 has been hampered by several big companies going ex-dividend, including GSK, AstraZeneca, Unilever, and Standard Chartered, which are contriving to pull up to 35 points off the UK benchmark. 

Europe

Rolls-Royce shares have soared to 14-month highs after reporting full-year revenues and profits that beat forecasts. New CEO Tufan Erginbilgic also announced the beginning of a strategic review which should also give a clearer idea of the direction he intends to take the business. On the numbers themselves, profits before tax came in at £206m, while underlying revenues increased to £12.69bn, helped by a stronger-than-expected performance in its civil aerospace division, which saw revenues rise by 25%, coming in at £5.69bn. Large engine flying hours were at 65% of 2019 levels, with the company expecting this to return to 80-90% of 2019 level in 2023, as China continues to reopen.

BAE Systems shares on the other hand initially slipped back from yesterday’s record highs after reporting full-year numbers that fell slightly short on profits, due to higher costs. As we head into the close, we have recovered all those early losses. Unlike Rolls-Royce, the bar is set much higher for BAE given that over the last 12 months, it has been the best-performing share on the FTSE100. Its position as a key defence manufacturer has pushed it to the forefront of investor radars given its position as a manufacturer of artillery shells and howitzer rounds, and other defence systems and hardware. Full-year revenues came in at £21.25bn, a rise of 8.9% while profits before tax were lower at £1.99bn. The company’s order book has soared to a record of £58.9bn, helped by new orders of £37bn. A final dividend of 16.6p will be paid pushing the total dividend up to 27p. On guidance, sales are projected to increase by between 3% to 5%, with earnings expected to rise by circa 5%.

Earlier this week packaging company DS Smith was downgraded due to concerns over weaker demand for packaging. Today’s numbers and guidance from sector peer Mondi, appear to reinforce those concerns after the company posted a decent set of full year numbers but posted underwhelming guidance, with the company pointing to softer demand and pricing.

Also doing well is WPP who reported that revenues for 2022 had risen by 12.7% to £14.42bn, pushing profits before tax higher to 22% to £1.16bn. The advertising company said that revenues and margins had held up well across all its regions.

British Airways owner IAG is also doing well ahead of the release of its full year numbers which are due tomorrow.

John Wood Group shares have also surged after the company announced it had rejected three separate offers from Apollo Global, with the most recent approach valuing the business at 230p per share.

US

US markets opened higher, after Q4 GDP was downgraded to 2.7%, with personal consumption revised down from 2.1% to 1.4%. Given the end of year weakness in retail sales perhaps this shouldn’t have come as too much of a surprise, and we know that retail sales surged 3% in January, so we know personal consumption has rebounded at the start of Q1. Q4 core PCE was revised higher to 4.3%

Weekly jobless claims came in at 190k, falling from 195k reinforcing the night nature of the US labour market. 

Today’s US open has also been boosted by a better-than-expected set of Q4 numbers from chipmaker Nvidia. Revenues came in line with expectations at $6.05bn, while profits saw a beat at $0.88c a share. On guidance, the company was more bullish contrasting with the pessimism that characterised its Q3 downgrades, projecting Q1 revenue of $6.5bn +/- 2%. With the increasing popularity of AI, the company appears to be banking on the push towards AI to drive its revenue growth given the slowdowns in other areas of its business, like gaming.

Alibaba shares have also risen sharply after reporting Q3 revenues of 247.76bn yuan, beating expectations of 245.87bn yuan, although its cloud business underperformed. EBITDA came in ahead of forecasts at 59.16bn yuan, with its main growth drivers being its global retail business and its logistics network. The reopening of the Chinese economy is only likely to see this trend improve. One of the main reasons for the profits beat was due to a reduction in costs, as the business shed over 4,000 jobs.

Electric car maker Lucid shares have fallen sharply after the company missed on its Q4 deliveries, generating $258m in revenue, well below forecasts of $315m, prompting a downgrade from BofA. The company said it expects to make between 10k to 14k cars well below expectations of 21.8k, on concern over future demand. It would appear the outlook for Lucid has become much less clear. Also in the EV sector, Lordstown Motors has slumped after pausing production and deliveries due to quality control issues. 

Netflix shares have fallen sharply after the company announced price cuts in over 30 countries and regions, including the Middle East, and Latin America. 

FX

There’s been some modest US dollar weakness in the aftermath of last night’s Fed minutes with the higher beta currencies performing slightly better, while the likes of the pound and euro have been struggling.

Bank of England policymaker Catherine Mann reiterated her view that more rate rises were needed to curb inflation dismissing the idea of a pivot to looser policy. She insisted that rates would have to stay higher for longer in order to return inflation to target. This shouldn’t come as a surprise as Mann has consistently been hawkish, however, it is likely to mean that the MPC will continue to remain divided with Tenreyro and Dhingra already arguing that rates may already be too high. 

The euro has slipped below 1.0600 against the US dollar despite core CPI rising to a new record high in January of 5.3%, cementing further the prospect of a 50bps rate rise in March from the ECB.     

Commodities

Crude oil prices have rebounded off the uptrend line support from the recent lows back in December as China demand expectations contrive to help keep a floor under prices, however with inventories due up there is a risk that further large builds could cap the upside.

Gold prices appear to be treading water just above the recent lows at $1,820, with the modest fall back in yields helping to keep prices above their recent lows.

Volatility

Earnings season may be drawing to a close, but this continues to provide ammunition for some meaningful price moves among blue-chip stocks. Yesterday’s numbers from Rio Tinto and that of a dividend cull drove interest in the miner, with one day vol coming in at 65.37% against 34.34% on the month. That news also saw another leg lower for BHP after its earnings release on Tuesday, taking losses here since the week’s highs to 7% with one day vol printing 56.21% against 33.61% on the month.

The Kiwi dollar was the most active of fiat currencies on Wednesday in the wake of the Reserve Bank of New Zealand’s decision to hike interest rates by 50 basis-points. This move had been expected and the bank added that that they still saw a recession coming in the next nine to 12 months, so the overall upside has been rather limited but one day vol on the kiwi against the greenback sat at 15.43% compared to 13.58% on the month.

Downside pressures persist for palladium prices, although support continues to be seen around the $1470 level. As noted previously, the metal seems susceptible to falling demand and a shift to other commodities by industrial manufacturers. One day vol here printed 57.67% compared to 50.62% on the month.

And in cryptocurrencies, activity remains broadly subdued with avalanche being the outlier here. One day vol against the US dollar sat at 99.43% compared with 81.14% for the month.


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