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Shell fires the FTSE towards 7,000

What a difference a month makes: from the doom and gloom of December, January looks set to see some decent gains as investors look at the latest earnings numbers, and take the view, despite a weakening economic outlook, that a lot of the downside may well be already be priced in.

European markets took their cues from last night’s surge in US stocks, and a positive Asia session, after the US Federal Reserve indicated that they may well be done in terms of the recent rate hiking cycle, as well as being more flexible when it comes to balance sheet reduction.

This change of tone is a significant shift in stance from the hawkishness of December but is nonetheless welcome in terms of market concerns at the end of last year that the Fed was on course for a significant policy mistake in hiking too aggressively.

While US economic data has continued to remain resilient there had been concerns that the sharp divergence in monetary policy which characterised 2018, could well store up further problems, if continued in 2019. There is also the small fact of the longest shutdown in US government history, coupled with a weak housing market, acting as an anchor on the US economy in Q1, and it would appear that the Fed has woken up to the risks of moving too far and too fast.

Thus the pause indicated by Chairman Powell last night would appear to be a welcome recognition of a new “wait and see” approach. The downgrade of growth from strong to solid must surely be a recognition of this new patient approach. This surely must be sensible if you believe, as most people do, that monetary policy operates with a lag. Looking ahead to 2019 there now has to be a real possibility that the Fed is done for this year and we’ll see no further rate rises in 2019.

It’s also a big earnings day today with a host of blue chip companies reporting and it’s been a bit of a mixed bag, with Royal Dutch Shell and Diageo outperforming, while BT Group and Unilever have lagged.

The sharp decline in the oil price certainly hasn’t hurt Royal Dutch Shell’s ability to improve its profitability as Q4 profits came in at $5.69bn, well above estimates of $5.39bn, a 47% rise on the same period a year ago. Overall profits for the year also improved with an 80% rise coming in at $23.35bn, sending the share price sharply higher in early London trading.

When it reported in Q3 Shell recorded its best level of cash flow from operating activities while reporting its highest levels of profits in 4 years. This trend continued in Q4 with the result that Q4 cash flow rose to $22.02bn which pushed overall cash flow for the up to over $53bn, a rise of 49%.

The biggest increase in cash flow generation came from its integrated gas business which rose 126% year on year to $14.6bn, though part of these gains were as a result of a $1.9bn sale of assets in New Zealand, India and Thailand, while production volumes rose 8%. Upstream and downstream improvements in cash flow showed much more modest improvements.

During the year the company completed the sale of upstream assets in Ireland, while also disposing of some other interests in Norway, as gearing came down from 25% to 20.7%. The company also announced the start of the third tranche of its buyback programme, by $2.5bn.

Unilever has been a stalwart of the FTSE100 over the last few years with shareholders fighting a successful battle last year to keep the primary listing here in the UK. This success resulted in the departure of CEO Paul Polman who retired at the end of last year, and today will be the first opportunity for new CEO Alan Jope to start mending fences with investors after the friction of the last 12 months. Today’s full year numbers aren’t the ideal way to start given that management have warned of a tough year ahead, in setting expectations for 2019.

Sales growth was disappointing in developed markets coming in at 1.3% in Q4, while overall sales for Q4 rose 2.9%. Turnover for the year was down 5.1% at €51bn, with some of this decline attributed to the sale of the spreads business, while net profits rise 51% to €9.8bn.

Management cited the disappointing outlook to weakening consumer confidence in emerging markets, particularly Latin America, as they guided the outlook for 2019 lower.

Drinks giant Diageo also posted its latest numbers for the 6 month period to the end of December last year.

Reported net sales rose 5.8%, coming in at £6.9bn, beating estimates of £6.53bn, while operating profits rose 11%, coming in at £2.45bn. The improvement was largely driven by improvements in China, which saw sales rise by 20%.

The company also announced it was extending its buyback program by $660m.

BT Group also announced its latest set of numbers for the nine month period to 31st December, and markets appeared largely unimpressed, sending the shares sharply lower. Revenues were down 1% coming in at £17.55bn, as the company warned that it was seeing aggressive competition in broadband pricing was eroding its margins. The consumer division saw revenues rise by 4% in Q3, however enterprise and global services both saw declines of 6% and 5% respectively, while its Openreach division saw a  9% drop in revenues.

US markets look set to continue where they left off last night with a positive open, after a decent reaction to the latest numbers from Facebook, which saw the shares move sharply higher in post market trading after the company reported a 30% rise in revenue and a 61% jump in profits.

We can also expect to hear from Amazon after the bell as it looks to reinforce its position as one of the big bellwethers of the global economy. Its share price plunged in Q4, along with the rest of the tech sector over concern that its valuation had become disconnected with reality, as well as a downbeat Q3 earnings update. It has recovered some ground since then after reporting a strong holiday period, where it sold a record number of items. Today’s Q4 update is expected to see EPS of $5.54c a share, but it will be the revenue number which will be more closely watched, as the company looks to consolidate its position as the key player in retail, advertising and web services.

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