European markets have had a more positive bias today, helped by broader resilience in the tech sector after last night's numbers from Microsoft and Google.
It’s also been a good day for more traditional areas of the market with positive numbers from the likes of Lloyds Banking Group, Reckitt Benckiser, and Smurfit Kappa, helping to push the FTSE100 to its highest levels in 6 weeks.
Lloyds Banking Group posted a strong set of numbers for Q2, as statutory pre-tax profits came in at over £2bn, well above expectations of £1.71bn, and a decent improvement on Q1’s £1.6bn. Having boosted its guidance on net interest margin and return on tangible equity in Q1, it did so again in Q2, raising both to 2.87% and 13% respectively. There appears to be nothing in these numbers to suggest that the UK consumer is in significant financial distress now, despite the challenging economic outlook. The bank also announced an increase in the dividend to 80p per share. Nonetheless management is right to remain cautious about the uncertainties facing the UK economy, while at the same time remaining optimistic about the full year outlook.
Consumer goods giant Reckitt Benckiser followed in the footsteps of Unilever yesterday, reporting a 12% rise in new revenue to £3.46bn in Q2, pushing H1 revenues to £6.9bn, and a rise of 4.4%. The company also raised its full year guidance for sales growth from 1% to 4% to between 5% and 8%, along with an increase in operating margins.
As with Unilever yesterday the company doesn’t appear to be seeing a significant impact from passing on price rises. Prices went up by 9.7% in Q2, yet volume of sales still increased by 2.2%, with gains across all of its divisions led by nutrition and health which saw like-for-like sales growth of over 20%.
With the increase of online shopping, demand for packaging has surged, and Smurfit Kappa has been a key beneficiary of that trend. Its H1 numbers have seen revenues rise by 36% to €6.38bn, although some of this improvement has been due to the acquisition of two corrugated converting operations in the UK, and a new operation in Morocco which has boosted capacity. Pre-tax profits rose to €769m, a rise of 86%, while boosting EBITDA margins to 18.4%. The company also boosted the interim dividend by 8% to 31.6c. Sector peer Mondi is also higher on the back of a positive read across.
The first set of numbers for GSK since the Haleon split, have received an underwhelming reception from the market. Q2 revenues increased by 19% to £6.93bn with the company raising its guidance on the basis of higher demand for vaccines and speciality prescription medicines. GSK said it expects adjusted operating profit to increase by 13% to 15%.
British American Tobacco shares have shrugged off a £957m impairment charge to reflect their departure from Russia, and ongoing costs from a DOJ investigation.
On the numbers themselves H1 revenues beat expectations, coming in at £12.87bn with new category revenue rising to £1.28bn, a 45% increase on 2021. Operating profits were down by 25% to £3.68bn, while the company maintained its full year guidance.
Australian miner Rio Tinto has slipped towards the bottom of the after cutting its dividend in half and reporting that profits decline in the H1. While profitability appears to be good, lower production rates and falling commodity prices appear to have affected the business.
Airlines are also trading higher in a busy week for trading updates with Wizz Air announcing further cuts to its summer schedule, extending its reductions from 5% to 10% as the sector continues to struggle with staff shortages at airports across Europe. IAG, easyJet and Ryanair are also higher.
US markets have started the day higher, despite some mixed economic numbers. Durable goods for June rebounded strongly, raising hopes that US Q2 GDP, which is due tomorrow will be a solidly positive number. Pending home sales for June on the other hand tanked 8.6% largely due to higher mortgage rates.
US investors appear to be responding to last night’s numbers from Microsoft and Alphabet which fell short of expectations on their recent quarterly updates.
Unlike a lot of other companies, it would appear that investors have a higher tolerance for misses from the likes of Microsoft and Google, although when you dig into the details, the numbers are still very good. When you’re talking about companies with the pedigree of these two, the bar to success or failure becomes vanishingly small and fickle, as to whether the numbers are good or bad. Look hard enough and you can always find a thread to pull on in any company’s quarterly numbers. The reality here is that both companies are trading close to their lowest levels this year, so a lot of bad news was probably already in the price.
Microsoft brought the curtain down on another record year by reporting revenues and profits which fell short of market expectations. Nonetheless Q4 revenues rose by 12% to $51.87bn, which was still a record number. Total revenues for the year were just shy of $200bn at $198.37bn, with Microsoft pointing to a strong US dollar and a slowing PC market as a bit of a drag. The Intelligent cloud segment, which includes Azure saw a 20% increase in revenue to $20.91bn, while its office division which includes LinkedIn saw $16.6bn in revenue. PC’s and gaming revenue was only slightly above the levels a year ago at $14.36bn, with negative sales growth in Xbox and content of -6% and Windows OEM of -2%.
As far as the outlook was concerned Microsoft said it expects to see Q1 revenues come in between $49.25bn and $50.25bn, which would still be 10% higher than a year ago, and hardly what could be called slowdown territory.
Concerns about a fall in advertising revenue were expected to adversely impact the Q2 numbers from Google owner Alphabet. These fears were confirmed as total revenue fell marginally short at $69.7bn, with YouTube falling short at $7.34bn. Search was more resilient with ad revenues coming in at $56.3bn, coming in line with forecasts, although profits fell short at $1.21c a share. As the market leader, a big miss here would have been troubling, so the fact that the numbers held up was encouraging. With the shares down over 25% year to date already perhaps the worst-case scenario was already priced in with the shares opening higher.
The focus now turns to Facebook owner Meta Platforms, and whether they have been able to see similar resilience in advertising revenues. Anecdotally this could be a tough ask with revenues expected to improve to between $28bn to $30bn, while investors ought to expect lower monthly active users due to the loss of its Russia user base.
With the Federal Reserve set to announce its latest policy decision the US dollar is treading water, with a slightly weaker bias probably as a result of some last-minute position adjustments. There is some speculation that the press conference could lean towards the dovish side, certainly in terms of market pricing that seems to be the direction of travel for rate markets. That seems unlikely given any dovish lean could undo the impact of recent tightening by the US central bank.
This is helping to push the euro up from yesterday’s lows, while the pound is holding above the 1.2000 level.
Natural gas prices in Europe have spiked up to four-month highs as gas flows through Nord Stream 1 get dialled back, falling to 20% of capacity.
Gold prices have retreated from their recent peaks ahead of today’s Fed announcement and Powell’s press conference.
Lumber prices fell again yesterday after a notable decline in US new home sales spooked the market. There’s an expectation that the housing market has further to fall too, given the dual impacts of rising interest rates and threat of recession. In the latter part of Tuesday’s trade, the lumber cash contract came close to those lows printed back in June, with daily vol advancing to 240% against 157% on the month.
As for fiat currencies, the Czech Koruna topped the board for price action amidst speculation that the country’s national bank would intervene again in a bid to support the price. Whilst still trading below the recent highs set back at the start of the month, the US dollar has advanced almost 20% against the Koruna since the start of the year. The pair topped the asset class in an otherwise unremarkable session with daily vol of 12.41%.
Finally, Talga, the Australian listed battery and advanced materials company, continues to find support amongst investors. The stock is up by more than 30% from the start of the month and further advances on Tuesday served to lift daily vol to 306%, up from the 221% posted for the month.
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