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A crude awakening for Biden, as oil prices rebound after SPR release

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European markets have seen a rather mixed session, with the FTSE100 outperforming on the back of a recovery in the oil price, which is supporting the oil majors, while a rise in iron ore prices is helping to support the miners, with Rio Tinto and BHP both higher.

Europe

The decision by the US in conjunction with other partners, to release 50m barrels from reserves, starting in December has seen prices rise, as oil traders cover shorts, amidst an expectation that OPEC+ might delay or reduce their December output hike in response. While this is probably not the response the Biden administration was expecting, it was also entirely predictable given that it was so widely telegraphed, and it’s not something that the US can repeat. A bit of a crude awakening so to speak, with BP and Shell both pushing higher.

We’re also seeing decent gains for Compass Group after the catering company posted full year pre-tax profits for the year that beat expectations. The return of sports venues and education and business catering saw much better numbers during the second half of the year. Despite a fall in revenues to £18.1bn, operating profits rose 55.4% to £811m, while margins increased by 160bps to 4.5%.

Irish building materials company CRH latest trading update has seen the business report an 11% rise in sales to $22.8bn, for the nine months year to date, equating to an 11% rise in EBITDA to $3.9bn.

In terms of its full year guidance management say they expect full year EBITDA to be in excess of $5.25bn, slightly ahead of consensus expectations, and 13.5% rise from last year’s $4.63bn.

UK house builders have underperformed a touch in recent weeks largely over concerns of what a possible interest rate rise might do to the housing market. These concerns seem somewhat overstated given we are talking a modest 0.15% rise in the base rate, and this appears to be being belatedly recognised by some in the markets, with Berenberg Bank raising Barratt Developments to a buy, although it cut its price target to 810p. This has also given a modest lift to Persimmon and Taylor Wimpey.

Severn Trent latest H1 results have seen the business post a £71m rise in turnover to £958m, as the lifting of lockdown restrictions boosted business consumption. Group profits rose to £256m a rise of £31m. Profits before tax increased to £146.9m, an increase of 20% from last year, however due to a tax charge of £326.9m the business slumped to a loss of £180m.

Of that charge, £294.2m was a one-off charge in respect of changes to corporation tax rate to 25% with effect from 1st April 2023, due to having to recalculate opening deferred tax balances at the new higher rate.     

Online electrical retailer AO World has seen its shares slide sharply, down over 25%, at one stage before recovering a little, after issuing a profits warning, saying that supply chain issues mean its peak trading period has been significantly softer than anticipated 8 weeks ago, and that full year revenues would be flat to -5% year on year, with group adjusted EBITDA expected to come in between £10m and £20m.

US

Having seen new record highs yesterday, the fact that we finished the day lower is a worrying sign we could see further losses in the short term. US markets after initially opening mixed, have rolled over again, with the rise in yields weighing on the Nasdaq and the wider tech sector more broadly, which is acting as a drag on wider sentiment.

The latest flash PMIs were a bit of a mixed bag, with services a little softer, however input prices in both manufacturing and services both pushed higher through November, reinforcing the inflationary pulses rippling through the global economy. 

Zoom’s latest Q3 numbers reflect the fact that while the business is still growing the rate of growth is starting to slow, with the shares falling sharply on the market open. This shouldn’t be unexpected given the return to normal working that has been seen over the course of the last 9 months. Revenues still increased, rising 35% to $1.05bn, and above expectations, with profits of $1.11c a share.

The company also said raised its guidance saying it expects Q4 revenues to come in at $1.05bn, and full year revenue of around $4.08bn, a rise of 54% year on year, and profits to increase to $4.84c a share.

Best Buy shares have also slumped sharply, despite beating expectations on Q3 revenues, coming in at $11.91bn. Profits also beat forecasts, coming in at $2.08c as the electrical retailer followed the trend set by its retail peers Target and Walmart last week. Full year revenue guidance was also adjusted higher to $51.8bn to $52.3bn. Given the shares edged up to new record highs yesterday, perhaps today’s declines aren’t too surprising, although some of today’s decline appears to be concern over rising costs impacting margins, after Q3 gross margins fell short of expectations.   

FX

The pound has come under pressure despite the latest PMI numbers showing continued resilience in the UK economy, against a backdrop of sharply rising inflationary pressures. Rising wages as well as increases in the prices paid for energy and raw materials helps to support the case for a modest rate rise next month. There appears to be a certain degree of scepticism as to whether the Bank of England will deliver on a rate rise when it meets just before Christmas, given recent comments from Governor Andrew Bailey at the weekend when he appeared to dial back some of his recent more hawkish rhetoric. MPC member Jonathan Haskell, normally considered a dove, was slightly more hawkish in comments made earlier today, as the banks guidance around monetary policy became even more confusing. For those of us hoping for clearer messaging under the stewardship of Governor Bailey after the Carney era, the last few weeks have been akin to fumbling around in the dark, which more or less describes the current messaging coming from the Bank of England MPC.

The euro has seen a modest rebound after hitting a 16-month low earlier, after two ECB policymakers expressed concerns about high inflation risk. Isabel Schnabel a member of the ECB executive board said that inflation risks were skewed to the upside, which was taken as a warning that the ECB could be inclined to consider a taper at its December meeting. This seems a bit of a stretch, especially since Schnabel is German so her bias is always likely to lean towards a more hawkish tone and given recent comments from President Lagarde any thoughts about a taper are likely to garner a fair degree of pushback.

Commodities

Crude oil prices rallied off its recent lows yesterday when OPEC+ suggest that any large scale SPR releases from the likes of the US and others might prompt a reassessment of its own measures to increase output by an incremental 400k barrels a day on a month-to-month basis. Today’s confirmation that the US along with its partners was releasing 50m barrels from reserves, starting in December has seen prices rise, as oil traders cover shorts, amidst an expectation that OPEC+ might delay or reduce their December output hike in response to today’s events. 

It’s hard not to think that perhaps the timing of this would have seen a greater impact if the US had waited until after the December output hike announcement from OPEC+ before acting.

Gold prices have continued to come under pressure as the rise in yields continues to boost the US dollar, as well as undermine the attractiveness of the yellow metal.


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