European markets have struggled to make gains today, ahead of this afternoon's Fed decision with the FTSE100 once again finding itself weighed down by concerns over Omicron, with weakness in energy prices and travel and leisure weighing on the UK benchmark. BP and Shell are acting as the biggest drag as oil prices hit a one week low.
Europe
The travel and leisure sector is again acting as a drag with IAG, easyJet lower along with Rolls-Royce, whose shares have dropped to their lowest levels in nearly three months.
It’s also been a disappointing day for retailers, despite some fairly upbeat updates from the likes of Inditex and Curry’s, however uncertainty over the outlook appears to be outweighing any appetite to pile back in.
Zara owner Inditex has seen a decent set of numbers for the year to date, although the share price reaction would suggest otherwise. The high street retailer has reported record revenues of €19.33bn a rise of 37% for the nine months year to date. Online sales increased by 28% from a year ago with a 129% increase from 2019. Net profits came in at €2.5bn, also a record.
Electrical retailer Currys has reported a cautious set of H1 numbers, with total revenue down 2% from a year ago at £4.78bn, however pre-tax profits increased to £48m, up from £45m. As for the outlook the retailer was more cautious, given a falloff in demand in the leadup to Christmas, which has sent the shares sharply lower. On a positive note, margins are stable, and the business is on course to meet expectations of profit before tax of £160m.
Hollywood Bowl full year results have seen total revenues only fall modestly from £79.5m in 2020 to £71.9m, which when you consider how long the business has been closed is impressive. Pent up demand since reopening in May has seen 28.6% increase in like for like revenue growth from 2019 levels, with record revenues in August of £20.1m.
Cineworld shares have dropped sharply after the Ontario Superior Court of Justice ruled against the company after it terminated its acquisition of Cineplex in June 2020 citing alleged covenant breaches. The court ordered Cineworld to pay Cineplex damages C$1.23bn for lost synergies and C$5.5m for lost transaction costs. Cineworld says it will appeal, which is a no brainer given its already high current debt levels, but one has to question where they will find the money if they lose. It appears that markets have similar concerns, with the shares down over 30%.
On the upside support services company DCC is leading the gainers after announcing the acquisition of Almo Corporation for $610m, and expanding its footprint into the North American market, and in so doing expanding the revenues of its technology business to approximately $2.3bn.
US
US markets slipped lower just after the open after retail sales for November came in below expectations, rising 0.3%, against an expectation of 0.8%. On the GDP measure they saw a nominal decline of -0.1%, however October was revised up to 1.8%. This appears to speak to a lot of US consumers bringing forward their pre-Christmas spending due to supply chain concerns, and as such seeing a November slowdown.
Today’s weakness is once again being driven by the tech sector and the Nasdaq 100, along with the Russell 2000, which is leading the losses, ahead of this afternoon’s Fed decision, as uncertainty grows over what sort of stance the Fed will adopt later today
We’re also seeing weakness in the energy sector as oil prices continue their recent slide lower, with WTI prices hitting a one week low, dragging on Exxon and Occidental.
FX
The pound has held up fairly well despite headline CPI hitting a ten year high of 5.1% and RPI hitting a new 30 year high of 7.1%, thus putting the Bank of England in an incredibly tricky position ahead of tomorrow’s December meeting.
Without the concerns over Omicron, a rate rise tomorrow would have been a no-brainer, and with the criticism from the IMF ringing fresh in its ears, the decision not to move last month, has once again highlighted the inability of the bank to project policy forward when it comes to guidance.
With PPI also surging to 14.2% they are now in the unenviable position of having to raise rates tomorrow against an uncertain economic backdrop or sit on their hands at a time when pricing pressures are likely to increase further, a hostage to events and with no scope to act before 2nd February, by which time inflation is likely to be even higher.
Given the current uncertainty, the bank's strategy now appears to be one of hold and hope, although futures are pricing a 50% probability they still might hike. There is an outside chance of this if they feel that Omicron could exacerbate inflation risk, but that would be entirely out of character for them, especially this close to Christmas.
There is also the concern that further delay in nudging rates higher means that inflation expectations become embedded, then the Bank will have to hike more quickly to counter the effects of a wage price spiral.
Commodities
As concerns about Omicron grow Brent crude oil prices have continued to slip back as the prospect of tighter restrictions into year-end weighs on sentiment. The IEA’s downgrade of its oil forecasts for Q1 yesterday, along with a firmer US dollar is weighing on prices.
Gold prices are also slightly weaker, ahead of this afternoon’s Fed decision, trading close to its lowest levels this month.
