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European markets slide back, on evacuation reports in Eastern Ukraine

Ukraine border

European markets initially had a more positive tone today, ahead of the weekend as the negativity from yesterday started to be replaced by cautious optimism that there will be no further negative developments ahead of next week’s meeting between US Secretary of State Anthony Blinken, and Russian Foreign Minister Sergey Lavrov.

Europe

Unfortunately, the early gains soon disappeared on reports that separatist leaders in Eastern Ukraine were evacuating their citizens in the region into Russia for their own safety.  

Despite today’s attempts to rebound it’s still been a negative week for the FTSE100, while markets in Europe look set to finish a choppy week pretty close to where they were two weeks ago.

The main drags on the FTSE100 have been banks, and the oil and gas sector, as the first weekly decline in Brent crude this year weighs on the sector.

Despite beating expectations on profits, NatWest Group shares have slipped towards the bottom of the FTSE100, and is amongst the worst performers this week, perhaps on the basis that it could struggle to match the performance of the last 12 months, in 2022.

Total profits for the year came in at £2.95bn, compared to a loss of £753m a year ago. The numbers were flattered enormously by the adding back of £1.28bn in loan losses reserves from 2020, nonetheless there was plenty to cheer from shareholders, of which the UK government is the main one.    

CEO Alison Rose said the bank expects to maintain ordinary dividends of around 40% of attributable profit and to distribute a minimum of £1bn in each of 2022 and 2023 via a combination of ordinary and special dividends.

Warehouse owner Segro shares have edged higher after seeing a big jump in the value of its real estate for 2021, as the demand for storage space helped drive an increase in annual profits of 20%.

Adjusted profit before tax rose to £356m, while the value of its portfolio of urban and big box warehouses rose 28.8% to £18.38bn, from £13bn in 2020, with the biggest gains being seen in its UK market, in terms of estimated rental value. 

Also doing well is Reckitt Benckiser, higher for the second day in a row after yesterday’s full year numbers. Markets appear to be encouraged by the positive outlook for its margins, and the company’s ability to pass on price rises.  

US

US markets took their cues from today’s uncertainty in European markets, opening mixed ahead of the long weekend, with the US off for President’s Day on Monday.

Roku shares have slid back over 20%, after reporting a mixed set of Q4 numbers. Revenue came in at $865m, slightly below expectations, while profits beat expectations, coming in at 17c a share. The number of active accounts came in at 60.1m for the latest quarter, falling short of estimates. While the revenues were disappointing, it appears to be the Q1 guidance that has tipped the shares lower. Q1 revenue estimates were also on the low side, coming in at $720m, and gross profits of about $360m.

On the face of it the numbers look pretty decent, however when a high bar is set sometimes it just isn’t possible to meet it, although a market cap below $20bn doesn’t seem that high when compared to its peers.

DraftKings shares have also dropped over 10% after the betting company fell short on its Q4 customers, although revenues did come in ahead of forecasts. Revenues came in at $473m, with the company boosting its 2022 revenue forecasts to $1.85bn to $2bn. The profit guidance was also disappointing, with the company warning that losses would be higher than expected, between $825m to $925m. This isn’t good news, and rather puts its audacious $22bn bid for UK based Entain a few months ago in perspective, with some relief that the bid didn’t succeed. Management of DraftKings should concentrate on making their own business profitable, before trying to take on someone else’s.

FX

Despite hitting a two-week high on Monday, the US dollar has slipped back this week, with commodity currencies getting a lift due to sharp increase in commodity prices.

The Australian dollar in particular has seen a lift on the back of rising precious metals prices, with gold hitting an 8-month high. The safe haven qualities of the Swiss franc and Japanese yen has also helped these currencies.

The pound has also managed to maintain a fair degree of resilience after retail sales in January rebounded strongly, by 1.9% although December was revised lower to -4%. Not only did fuel sales recover, but we also saw a strong rebound in household goods and furniture, with high street sales showing a decent pickup. The numbers also show that while demand appears to have picked up, the retail sector still has to confront significant challenges in the months ahead as prices rise, and disposable income starts to reduce.

Commodities

Gold prices hit their highest levels in 8 months earlier this week on the back of deteriorating risk sentiment, as well as rising inflation risk. Increasing inflation appears to be improving the yellow metals attraction as a traditional inflation hedge.

After 8 weeks of gains crude oil prices have had another choppy week, hitting a new 7 year high in the process, however gains have been tempered by reports that there might be a deal to return Iranian crude to the market. This appears to have prompted some nervousness ahead of the march towards $100 a barrel, with the result we look set to see the first negative week since mid-December.

Volatility.

The Evraz share price lurched lower again yesterday amidst ongoing speculation that Russia wasn’t pulling back from its threat to invade Ukraine. It’s the same story playing out here in that Evraz would be a classic example of a company getting caught out by sanctions, driving one-day vol up to 145% against a monthly figure of 93%.

As for commodities, interest again revolves around oil prices and although there does seem to be a reluctance to push any higher, for now, any escalation in Eastern Europe would likely move sentiment here. As an example, UK Crude Oil volatility hit 46%, up from 34% on the month.

In terms of currencies, Aussie Dollar - Yen was the standout, with renewed risk aversion driving interest in the Yen as a safe haven, whilst signals that the RBA may hold tight for another few months before hiking rates is also weighing on the cross. One day vol hit 15.16% up from 11.93%, with Euro – Yen showing a similar, if slightly less exaggerated, pattern.

Equity indices appear relatively subdued, whilst there was only limited interest in Cryptos with IOTA being something of a standout. One day vol here rose to more than 250% against a monthly reading of 120%.


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