European markets have slipped back sharply today, with all sectors lower, except for energy, which is being buoyed by the surge in energy prices, as oil prices nudge above $80 a barrel and natural gas prices in Europe hit new record highs. The rise in energy prices isn’t just affecting Europe and the US, with China having to impose power cuts to preserve inventory levels.
The FTSE100 is outperforming the rest of Europe, largely due its overweight energy component.
Europe
Having been told for months that inflation is transitory it is becoming increasingly apparent that the rise in energy prices, along with associated supply chain problems is acting as a headwind to growth and will likely prompt a sharp slowdown in economic activity, as well as an element of demand destruction.
Smiths Group is the best performer today after reporting full year numbers that beat expectations. While revenue fell by 2% to £2.4bn, operating profits rose 7% to £372m while margins increased by 140bps.
The company also confirmed the sale of Smiths Medical to ICU Medical for $2.4bn, while returning £737m to shareholders.
Heating and ventilation supplier Ferguson also reported full year numbers that beat expectations, revenues rising 14.3% to $22.79bn, while profits before tax rose 46.4% to $1.89bn. The company also announced a share buyback of $1bn, having completed the sale of its UK division Wolseley back in January.
With Brent crude prices pushing above $80 a barrel, Royal Dutch Shell shares are up for the fifth day in a row, and another 18-month high, with BP shares also on a similarly bullish run.
After 8 successive days of gains which has seen its share price rise by over 20% in the last month, Rolls Royce shares are down heavily on the back of some probable profit taking.
Sage Group is also lower on the back of a broker downgrade.
US
US markets opened lower led by the tech sector, with the Nasdaq leading the way lower, and unlike yesterday, we’ve also seen the Dow, S&P500 and Russell 2000 also seeing big falls. US consumer confidence also saw another sharp fall in September, coming in at 109.3, and a 6-month low, reinforcing the cautious narrative that began back in August when consumer confidence unexpectedly plunged from 125.10.
The tech sector is leading the fallers with Microsoft the biggest faller on the Dow, while on the S&P500 we’re seeing big falls from the likes of Etsy, Twitter, and Moderna.
Oilfield services groups Halliburton, Schlumberger and Marathon are amongst the best performers as surging energy prices help support the energy sector.
FX
Despite the increasingly hawkish narrative of the Bank of England the pound has sunk like a stone today, hitting its lowest levels against the US dollar since January, and a two-month low against the euro. This seems somewhat counterintuitive at a time, when both it and the Federal Reserve are talking of tightening policy, and yet the pound is the worst performer on the day.
This suggests that markets either don’t believe what the Bank of England is saying, or that the increasing pressures on the UK economy could well act as a significant drag on growth into, and beyond the end of this year. While markets appeared content to believe central banks that inflation was likely to be transitory it is becoming increasingly apparent that it may well not be, with all the attendant risks that could lead to demand destruction, and an economic slowdown. UK gilt yields hit their highest level since March 2020, with the 10-year blasting through 1%, spilling over to 1.06% before slipping back.
The US dollar index has nudged up to its highest levels this year, with the pound bearing the brunt, however the commodity currencies are also being hit hard, with the Australian and New Zealand dollar also lower, along with the Norwegian Krone.
Commodities
Brent crude oil prices have moved above $80 a barrel for the first time since October 2018, and although they have since slipped back, there is a concern they could well continue to go higher and retest the October 2018 highs, with the next key resistance at $86 a barrel.
Gold prices have continued to feel the heat from the rise in yields, but also a surging US dollar as well, pushing to its lowest levels since the flash crash lows set back in August.
