News

FTSE 100 hit by big oil stocks, gold pops

CMC Markets

The FTSE 100 is underperforming against its continental counterparts on account of the bearish moves in Royal Dutch Shell and BP.

Europe

Royal Dutch announced a large impairment charge and the fall in the underlying oil market has hit BP too.

Sentiment in equities has also been impacted by worries about the rising number of coronavirus cases, and the increase in localised lockdowns. Recently various US states have witnessed a jump in the number of infections, which has prompted some states to row back on reopening their economies. There is a fear that governments can only loosen their restrictions so much before the infection rate jumps, so that is playing on traders minds’.

Prime Minister Johnson revealed a £5 billion infrastructure spending plan. The move is aimed at stimulating the economy. In the current climate the UK economy can do with all the help it can get, but the sum of money in question is very small in the grand scheme of things - in 2018, the UK’s total output was £2.2 trillion.

Royal Dutch Shell shares are lower today after the group said its second quarter update will include an impairment of $15-$22 billion. The writedown is because the company changed its price forecasts for oil and gas – energy companies’ use assumed commodity prices as a way to value their assets. The slump in energy prices in March and April prompted the company to revaluate its forecast for oil and gas prices. Previously, Royal Dutch factored in an oil price of $60 for 2020 through 2022. Now it assumes prices of $35, $40 and $50 for 2020, 2021 and 2022 respectively. Gas prices were also revised, for example, the assumed price for 2022 is now $2.5 per million British thermal unit, while previously the company was working off a $3 basis. Recently BP did something similar in terms of announcing an enormous writedown, so the update from Royal Dutch wasn’t a surprise.  

Smiths Group confirmed that all of its 75 manufacturing sites are in operation but the group warned that costs are likely to increase.  Firms that have managed to remain open amid the coronavirus crisis have stood out in relation to those that were forced to close, but they have typically incurred higher costs due to the increased health and safety measures. Smiths are already conscious about overheads as they have a restructuring plan in place and that should save £70 million from FY2022. The programme should help the firm achieve its target of operating margins of between 18% and 22%.

InterContinental Hotels Group has been hit extremely hard by the lockdowns. The company predicts that revenue per available room (RevPAR) in the first half is expected to fall by over 50%. In The West, the lockdowns were introduced in March, so the second quarter was particularity painful, and RevPAR is anticipated to slump by roughly 75%. The hotel chain is on schedule to achieve savings of $150 million.        

US

After starting off slightly in the red, the S&P 500 is now showing a modest gain, while the NASDAQ 100 is comfortably above the 10,000 mark. The health emergency is still an issue for the US, but traders are not concerned about it at the moment.

The Chicago PMI report for June was 36.6, its highest level in three months. The Conference Board consumer confidence report jumped from 85.9 in May to 98.1 in June, these updates add weight to the argument the US economy is bouncing back.  

Micron shares are higher today as the company posted solid third quarter numbers last night. Working from home has become hugely popular on account of the lockdowns, so data centre chips have seen a surge in demand, and that in turn has helped Micron. EPS were 82 cents, topping the 77 cents forecast. Revenue jumped by 13.8% to $5.44 billion and that topped forecasts. The fourth quarter revenue guidance was optimistic too as Micron anticipate revenue to be $5.75 billion - $6.25 billion. The midpoint of equity analysts’ forecasts was $5.84 billion.         

Last week the Federal Reserve announced that US banks will have their dividends capped as the central bank predicts that there will be a huge increase in the number of loan defaults. The update from the Fed put pressure on banking stocks as traders felt they are likely to trim their payouts as a way of conserving cash. Last night, Wells Fargo, announced that it will have a new dividend policy, so some dealers took the view the bank was signalling to the market that it intends to cut its dividend. 

Jerome Powell, Fed chair, and Steven Mnuchin, the Treasury Secretary, will testify before the House of Representative’s Financial Services Committee late today. Politicians will ask about the progress of the various stimulus packages.      

FX

The US dollar traded higher for much of the session as traders were in risk-off mode earlier. In the past few months the dollar has been a popular safe haven trade, and that was the case earlier today, but sentiment changed a little, and now it is flat. At lunchtime, the US dollar index hit its highest level since the start of the month, but it has retreated since. 

The move in the dollar has weighed on EUR/USD, but the euro has pulled back some of its losses.  Headline CPI in the eurozone nudged up from 0.1% in May to 0.3% in June, but keep in mind the core CPI level slipped to 0.8% from 0.9%. The core report is a more accurate reading of true demand as it strips out commodity prices. Oil has jumped since late April, so that is possibly why the headline CPI number ticked up, but the core metric points to weaker demand.  

GBP/USD has been gaining ground in the wake of the mixed comments from Michel Barnier, the EU’s chief negotiator. Mr Barnier said a post-Brexit banking deal was unacceptable, but an overall deal was still possible and both sides are working hard to achieve it. The final reading of UK GDP for the first quarter was -2.2%, on a quarterly basis. Economists were expecting the reading to be unchanged from the previous reading of -2%.  

Commodities

WTI and Brent crude are down on the day as there are worries about demand, but there is also chatter that Libya’s exports will come back into the fold. The spike in Covid-19 cases in various places around the world as well as localised lockdowns has chipped away at the oil market for fear that demand will dip. In addition to that, there are some optimistic noises coming from Libya that oil exports might resume as some peace and stability might be restored to the country.

The inverse relationship between gold and the US dollar continues to be strong. The metal was a little lower this afternoon due to the increase in the greenback, but since the dollar gave up its gains, the metal went on to hit its highest level in over seven years. The metal is currently up over 12% in the second quarter.

Copper hit a five month high due to supply concerns. Chinese manufacturing hit a three month high, so that has helped too.

CMC Markets is an execution-only service provider. The material (whether or not it states any opinions) is for general information purposes only, and does not take into account your personal circumstances or objectives. Nothing in this material is (or should be considered to be) financial, investment or other advice on which reliance should be placed. No opinion given in the material constitutes a recommendation by CMC Markets or the author that any particular investment, security, transaction or investment strategy is suitable for any specific person. The material has not been prepared in accordance with legal requirements designed to promote the independence of investment research. Although we are not specifically prevented from dealing before providing this material, we do not seek to take advantage of the material prior to its dissemination.