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FTSE 100 underperforms, although BP helps to limit the damage

BP logo

It’s been a lacklustre start to the week for the FTSE100, largely due to markets in Europe seeing a big decline yesterday, which they have only marginally managed to recover from today.

Europe

To read some of the narrative today you’d be forgiven for thinking that BP had committed a heinous crime over the past three months, by reporting an underlying quarterly profit of $6.25bn, its highest in more than 10 years, mainly due to a combination of higher energy prices and decent trading revenues. The main driver of this impressive performance was adjusted oil and gas production and operations, which saw profit before tax and interest, come in at $4.68bn, beating expectations of $4.5bn.  

These are certainly impressive numbers; however, they pale into insignificance when compared to the $29.9bn writedown the company is taking with respect to its Russia assets, which include Rosneft. When the writedown is included, BP slipped to a Q1 loss of $20.3bn, which when compared to its 2020 loss of $20.3bn and its $12.8bn profit from last year means that in the last two years the company hasn’t made a bean, and when today’s Q1 loss is priced in, may not make much profit this year either. Despite this, investors seem happy given that BP has said it will buy back another $2.5bn in shares, as well as announcing a further reduction in its net debt to $27.5bn, down from $33.3bn a year ago

Defence contractor BAE Systems is higher pushing back towards its April record highs as this sector continues to benefit from expectations over the prolongation of hostilities between Ukrainian and Russian forces. The travel and leisure sector is also having a good day after Wizz Air reported a 542% jump in passenger numbers in April, raising the prospect of a solid summer rebound for a sector that has underperformed year to date, with IAG and TUI seeing some decent gains.

Real-estate investment trust company Segro shares are the biggest fallers today on the back of a broker downgrade to reduce from Kepler Cheuvreux. In April Segro admitted that warehousing costs were starting to get higher. The company expects to spend £700m on building warehouses and maintaining existing ones and that rents will need to go up to meet these higher costs. We’re also seeing some softness in basic resources, largely due to yesterday’s China hangover from the weekend PMIs with Glencore, Antofagasta under pressure.

Unilever shares are also lower, pulling back from Friday’s eight-week highs on the back of some modest profit-taking, after a decent rebound off its March lows.

US

US markets underwent a sharp turnaround yesterday after hitting their lowest levels this year, and while we saw a decent rebound, the fact that we made fresh lows suggests that investors remain highly uncertain about what to expect from the Federal Reserve tomorrow.

We’ve seen a cautious start to proceedings today with the latest March factory orders numbers coming in better than expected at 2.2%, while the latest JOLTS numbers of job openings rose to 11.5m from 11.26m. The jobs opening numbers suggest the Fed certainly has room to raise rates quite aggressively in the months ahead, before there is a significant effect on vacancy and unemployment levels.

Having come off a record revenue and profits number for 2021 Pfizer shares have slipped quite a bit from their record highs of last year. After posting revenues of $81.3bn last year annual revenues are expected to rise to a record $102bn this fiscal year, helped by the company raising its prices, with over half of that sum expected to come from its new Covid pill as well as the vaccine, to the tune of $54bn. Today’s Q1 numbers have seen Pfizer maintain that revenue guidance with Q1 revenues of $25.66bn, with vaccines making up $14.94bn of that sum. On the flip side, full year profit forecasts have been revised lower to $6.25c to $6.45c, due to an accounting policy change that is likely to see a negative FX effect.  

FX

The Australian dollar is the best performer today after the RBA unexpectedly hiked interest rates by 0.25% to 0.35%. There had been some doubt that the RBA would act just before the Federal election later this month in case it might be construed as being political, however if they were to do so it would probably only be by 0.15%.

Neither of those scenarios played out with the Aussie rising sharply on the basis that the RBA will probably move again next month in an attempt to get ahead of the recent sharp rises in inflation. Governor Philip Lowe in his press conference earlier today indicated that rates could go as high as 2.5%, with 1.5% to 1.75% by year end.  

The pound is also edging higher after this morning’s surprise decision by the RBA to pull the trigger on a bigger than expected rate rise. This has raised speculation that the Bank of England might decide to put aside its traditional caution when it comes to raising rates and also go with a 50bps move on Thursday. The decline in the value of the pound against the US dollar is a particularly unwelcome development over the past 3 months falling from $1.35 to its current levels of $1.25, and along with the rise in commodity prices exacerbates upward pressure on inflation.

The US dollar has slipped back as this week’s Fed meeting gets underway, and ahead of tomorrow’s expected 50bps rate rise, as currency traders pare back positions.  

Commodities

Crude oil prices are under pressure again, despite Germany announcing that it is in favour of an oil embargo on Russian oil imports. While this is an important development this is something that is likely to take time to implement, while concerns about Chinese demand are more immediate With concern rising that the lockdown in Shanghai could be extended to Beijing the outlook for Chinese demand has continued to darken, which in a way is good news for consumers elsewhere if oil prices fall back below $100 a barrel.

Gold prices have suffered over the last week or so slipping back to 2 and a half month lows as a stronger US dollar, and higher US yields weigh on the pull factor of this haven asset. Tomorrow’s Fed meeting is likely to be the catalyst for the next move in the yellow metal, which only two weeks ago came within touching distance of $2,000 an ounce.  

Volatility

A brief flash crash across Nordic markets on Monday has dominated the volatility data in what was set to be a quiet start to the week with many major markets such as London and Frankfurt being closed for a public holiday. As a result, standouts for price action included the likes of H&M, Orange and Veolia, all of which saw their share prices briefly plummet, sending daily vol in each to above 250% versus monthly figures of 170% to 215%. Reports this morning note that Citigroup has admitted making the error, with the impact exacerbated given the limited number of markets trading at the time.

It did however have a knock-on effect on those indices open for trade yesterday, with the Swedish 30 falling as much as 8% at one point, topping the board as daily vol hit 124% against 79% on the month, whilst the Norway 25 wasn’t far behind, reading 104% on the day versus 35% on the month.

Looking at fiat currencies, it’s a theme of risk aversion that continues to dominate as both Chinese supply chain concerns and the ongoing Russian invasion of Ukraine dictate sentiment. The pairs seeing the most activity remain the same from recent weeks with Dollar Rand reaching 19.94% on the day against 15.49% on the month, whilst Dollar Forint posted 17.91% on the day versus 14.74% on the month. This latter one is notable in light of the aggressive policy tightening by the Hungarian Central Bank that is failing to stem the Forint’s sell-off.

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