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FTSE 100 hits three-week high, windfall levy weighs on UK oil and gas

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It’s been a decent week of gains for markets in Europe, with the FTSE 100 enjoying a particularly strong performance, on course for its best week in over two months. 

Europe

This outperformance has been helped by decent gains from the likes of Ocado, Kingfisher, B&M European Retail and Primark owner Associated British Foods, after yesterday’s fiscal stimulus package, took the pressure off UK consumer incomes with over £650 of help for the most vulnerable households, along with a £400 one-off payment to every homeowner.

Having had a bit more time to dissect yesterday’s windfall tax announcement from the UK government we’ve seen further weakness in the UK oil and gas sector. While BP and Shell shares have held up quite well, they are still down today, after BP said it would review all of its investment in the UK and North Sea, which could well lead Shell to do the same thing. Earlier this year Shell submitted a new plan for its Jackdaw gas project with a delivery date in late 2025, after it was rejected last year. Could yesterday’s events prompt a reappraisal of that, even if it gets approved?   

The smaller UK oil and gas companies have been hit the hardest given they earn all of their revenue in the UK, and their shares are down hard, not only today, but this week as well. Harbour Energy, which was formed out of the wreckage of Premier Oil and Chrysaor in April last year, and whose shareholders have had a torrid time over the past 5 years, is the worst performer on the FTSE 100, but we’ve also seen EnQuest and Serica Energy slide back as well, given that the majority, if not all of their revenue, comes from the North Sea

We’re also seeing weakness in the UK grid and power suppliers over concerns they could be next in line for some form of levy, with SSE, Centrica and National Grid all falling back for the second day in a row, and down on the week.  

US

US markets have opened higher today as they look to complete their first positive week since early April, in a welcome respite for battered dip buyers.

The latest US PCE inflation data which the Federal Reserve uses to measure underlying inflation saw a decline in April, from 5.2% to 4.9%. Also, encouragingly the latest US personal spending data showed that US consumers were still inclined to spend money with a rise of 0.9%, which was slightly higher than markets had been expecting.

With US consumers still looking fairly resilient we can safely conclude despite some of the earnings misses being seen by US retailers that money is still being spent, however it appears to be being spent in different parts of US retail as consumers become more cost conscious. We’ve seen downside surprises in the likes of Walmart and Target, yet Dollar Tree and Dollar General have surprised to the upside.

Staying on the retail theme, GAP shares have plunged after reporting a bigger than expected loss in Q1. The retailer who owns the Old Navy and Banana Republic brands also downgraded their full year outlook for profits from $1.95c a share to between $0.40c and $0.70c a share. Its Old Navy

It was a similar story for American Eagle Outfitters which have also slid sharply after its quarterly and revenue numbers came in light.

It’s been a classic case of withdrawal symptoms for cannabis company Canopy Growth after it missed on revenues, as well as posting a bigger than expected loss in its Q4 numbers. Revenue came in at C$111.8m well below expectations of C$131.6m while losses narrowed from last year, but not by as much as the market had hoped, coming in at -C$121.8m.

FX

The US dollar looks set for its second successive weekly decline in line with weaker US treasury yields, which appear to be driving this recent weakness. The recent weakness appears to be being attributed to markets pricing out some of the more aggressive rate hiking scenarios. While that may be true, and there’s little evidence of that, it appears more likely that the greenback is losing ground as traders’ price the prospect of more aggressive tightening from the likes of the European Central Bank, the Bank of England and other central banks. There’s also the old favourite of good old fashion profit taking. This week’s windfall tax inspired fiscal stimulus has also given the pound a boost as markets price in more rate hikes from the Bank of England in the coming months.

Commodities

Brent crude and US oil prices hit their highest levels in two months today, as lower inventories spark a rush for new capacity, with the Biden administration looking to try and persuade its domestic oil industry to reopen closed refineries, in an attempt to call a halt to the continued rise in US gasoline prices. Unsurprisingly, US refiners aren’t that enthusiastic given that when Biden came to power his attitude towards the industry was anything but friendly.

Gold prices look set for another modest weekly gain, its cues from a weaker US dollar, and softer yields offer a further respite to the yellow metal.

Volatility

An analyst downgrade on Kraft Heinz yesterday served to rattle sentiment in the stock, as concerns over the corrosive impact of inflation – and the fact that shares in the food giant had been outperforming of late – took a toll. The underlying fell almost as much as 10% at one point before reversing some of the losses but daily vol pushed out to 254% against 93% on the month.

However, it was far from universally gloomy for retail stocks after discounter Dollar Tree saw its earnings beat expectations. This was sufficient to fully reverse last week’s sell-off in the company with shares adding more than 20% on the day. Daily vol here hit 386% against 162% on the month.

That long-awaited Turkish Central Bank meeting took place yesterday with the outcome being rates left unchanged at 14% despite inflation running at 70%. That served to limit further downside for the Lira at least for now, but a choppy session still saw daily vol at 16.86% against 13.89% on the month. However, the Hungarian Forint topped the board after talk of windfall taxes spooked the market, driving vol against the greenback to 22.73% on the day and 17.96% on the month.

Finally, with cryptos, again the wider asset class continues to calm, with daily vol still printing below the monthly levels. Ethereum Classic proved the most active here, with daily vol of 117% against a monthly reading of 131%.


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