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Banks bookend the FTSE 100

NatWest shares slide

European markets had for the most part of today seen a broadly positive session, however these gains seems to be evaporating as we head into the close, with the DAX taking the brunt, down around 1%. The FTSE 100, on the other hand briefly moved back above 7,000, hitting its highest level since 19 April, before it too started to slip back.

France’s CAC 40 set itself apart, making a new 20-year high, on the same day it was announced that France is proposing to reopen shops and cultural venues on 19 May, while ending curfew measures on 2 June. This comes as somewhat of a surprise given current levels of infection in France, particularly since Germany has only just tightened restrictions through June.

Having got off to such a good start, and US data looking so promising it’s a little surprising to see stocks slide back, however today’s gains appear to be being tempered by a sharp rise in US 10-year yields, which at the time of writing are up 7bps, and appear to be acting as a bit of a drag.

Today’s big gainers have been financials, with Asia-focused Standard Chartered leading the way higher after seeing an increase in Q1 profits of 18% to $1.4bn. Income came in lower at $3.9bn, however the banks more optimistic outlook along with a sharp reduction in impairment expectations, helped push the shares back towards its March highs. This upbeat has also served to give HSBC a lift who reported decent numbers earlier this week.

Unfortunately, it's not all been sugar and spice and all things nice, with NatWest shares underperforming after disappointing on margins. Having seen Lloyds Banking Group release £323m of its loan loss reserves onto the balance sheet earlier this week, there was an expectation that NatWest Group would do the same. Sure enough, the bank did just that with the better UK economic outlook prompting the release of £102m back on to the balance sheet, which in turn boosted profits to £946m, above expectations of £539.5m. Like Lloyds, NatWest has also seen a rise in customer deposits during the quarter, with an increase of £7.3bn, compared to Q4, as customers cut back on spending during the lockdown. Similarly, mortgage lending was robust with an increase of £9.6bn, while personal loan demand saw a decline, as did the level of credit card balances.

These similar patterns in two of the UK’s biggest banks show that they appear to support the argument that UK consumers have been holding back, and that as restrictions continue to get eased, we could well see a wave of spending in the summer months, barring any setbacks in the vaccination program, or new variants. In terms of the wider numbers, total income was down from a year ago, falling £503m to £2.66bn, which was a little disappointing, but also not altogether surprising.

On the wider concern regarding its margins NatWest has the thinnest in the UK banking sector at 1.66% and given how the yield curve has steepened over the last three months we should have expected to see an improvement here, and we haven’t, seeing a fall to 1.64%. The bank has blamed this on lower structural hedge income. A year ago, net interest margin was at 1.89%, while earlier this week Lloyds upped their estimates for NIM, so NatWest have plenty of room to improve here, with the shares slipping back sharply on disappointment around the inability of the bank to improve on its margins. We could also be seeing an element of profit taking, after a decent run higher in the last month or so. With respect to the outlook, the bank was broadly positive, at the same time as reiterating its previous guidance. CEO Alison Rose also said that in the event of a vote for Scottish independence the bank would have to move its headquarters out of Scotland due to the size of its balance sheet.

It’s no secret the oil and gas sector has had a rollercoaster ride over the past 12 months, with dividends being cut, or reduced and huge losses being absorbed as various assets get revalued. BP’s numbers earlier this week have shown decent progress on reducing debt to more manageable levels, while boosting profits as a result of decent trading numbers.

Royal Dutch Shell has shown similar progress on net debt, after it jumped up to $75.4bn in Q4. In Q1 this has come down to $71.25bn, but is still short of its $65bn target, where we could see the company resume its buyback programme. In terms of revenues for Q1, these came in at $59.1bn, while profits beat expectations, coming in at $3.23bn, with the company also hiking the dividend by 4% as a consequence of the better-than-expected profit number. On a more worrying note, cashflow from operations was down 44% year on year to $8.3bn. With respect to the outlook for Q2 Shell said it expects LNG production to come in around 940k BOE/D, a slight reduction from Q1’s 967k, while oil and gas production is also expected to be weaker at around 2.25k BOE/D, as a consequence of maintenance shutdowns.   

Unilever shares are also higher after announcing a €3bn share buyback. Q1 sales saw an increase of 5.7%, although turnover declined to €12.3bn, with most of this being driven by emerging markets. The numbers were driven by strong sales of cleaning products in a mirror image of a similarly strong performance from Reckitt yesterday. Unlike Reckitt there was also a strong performance in other areas of the business with its skin care business also performing well. In 2021 the company said it expects to deliver sales growth of 3-5%, with an outperformance in the first half, followed by a slowdown in H2. Management said that plans to separate the tea business are expected to come to fruition later this year, with options being considered including a disposal, an IPO, or a demerger. The separated business has revenues of around €2bn per year. Plans are also under way to split out a number of its smaller personal care brands including Timotei, Q-Tips and Tigi, and will operate under the name Elida Beauty.

BT Group shares are also higher on reports that it is in talks to sell BT Sport. This is welcome news from a cashflow point of view. Given BT’s other obligations in terms of 5G and broadband upgrades they simply don’t have the resources to compete with the likes of Sky, as well as the new entrants to the market like Amazon. Any additional money that can be freed up by the disposal of this asset can be better spent in supporting its various networks where it is making significant progress. Furthermore, given the recent controversy over the Super League, appetite for top flight football may be on the wane. I can’t remember the last time I watched a Champions League game, and I’m sure I’m not the only one. There are quite simply too many subscription options for the average football fan.

Medical Devices company Smith & Nephew saw a big increase in Q1 revenue, pushing the shares to a two-month high, as a rebound in elective surgeries saw revenue in orthopaedics rise by 1.6%, driven by a rise in hip implants. Sports and Medicine revenue also rebounded for the same reason, rising 10.4%, helping to push revenues up to $1.26bn.    

US

US markets have taken their cues from today’s positive start for European markets with the S&P 500 surging through 4,200 to open at a new record high, along with the Nasdaq. On the data front the latest weekly jobless claims came in at 553,000, the third week in succession below 600,000, while Q1 GDP came in at 6.4%, slightly below expectations, while news that New York is planning for a full reopening on 1 July hasn’t hurt. This news in turn has seen US 10-year yields also push higher, up almost 7 basis points, something that two months ago would have had stocks rolling over, and while this isn’t happening this time it does appear to be pulling stocks off their intraday highs. US pending home sales only rebounded modestly in March after the 11.5% decline in February, rising 1.9%

Unsurprisingly given the blow out earnings from Facebook and Apple these two tech giants were leading the early gainers, with Facebook shares also setting a new record, rising 8% on the open, after last night’s Q1 numbers saw earnings surge by 48%. A record second quarter for Apple saw revenues surge to $89.58bn, driven by sales of iPhones, $47.9bn, iPad’s, $7.81bn, services, $16.9bn, Mac’s, $9.1bn and wearables of $7.84bn. This was a huge increase on last year's $58 3bn and well above expectations of $77bn. A $90bn share buyback isn’t too shabby either, and while the shares shot up on the open, they have since drifted back.  

McDonalds also saw a decent first quarter, with same store sales in the US helping to push revenues up to pre-pandemic levels of $5.1bn. European sales were a bit more of a drag, particularly in Germany and France, however profits still came in better than expected at $1.92c a share. eBay on the other hand has seen its shares get hosed, sliding over 7% after warning on future guidance, despite beating expectations on both revenues and profits for Q1. The company warned profits and sales might slow, prompting a raft of downgrades. Amazon’s latest numbers are out later this evening with a particular focus on its AWS division and whether margins can be sustained.     

FX

The US dollar is slightly firmer across the board, after hitting a two-month low earlier today, with the biggest gains against the Japanese yen, while the pound is holding its own, after Bank of America suggested that continued improvement in UK data could well prompt the Bank of England to taper its bond purchase program in May.

This is a topic that hasn’t really been considered given that only a few weeks ago the debate was about the prospect of negative rates. While some on the MPC would like to keep that option on the table, it’s a lot further away now than it has ever been. It would be naïve to think that the bank is about to consider raising rates anytime soon, but there is likely to be an increase in discourse about the prospect of the bank becoming less accommodative over concerns that current policy might be a little too easy.  

Commodities

Commodity prices have maintained their resilient bias today, with copper prices making new multi-year highs, briefly breaking above $4.50 a pound, before slipping back.

Crude oil prices have also continued their positive bias, breaking to one-month highs on optimism over an economic reopening, as markets set aside concerns over rising infection rates in India and Turkey and focus on the positives, and the prospect of a strong rebound in demand.

Gold prices have slid back from their recent highs, not altogether surprising given the sharp rise in US 10-year yields.


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