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Shell buyback helps to boost the FTSE100

Shell fuel tanker

It’s been another choppy session for markets in Europe, with the FTSE100 pushing higher, helped by strong gains from the energy sector, after Shell announced another decent set of quarterly numbers.

Europe

Shell shares have led the gains in London after the oil major announced another share buyback, this time of $4bn despite slightly missing expectations on Q3 profits.

Despite the miss the numbers were still the company’s second-best quarter. Slightly more concerning was a $2bn rise in net debt, however as long as this is a one-off it probably isn’t too much of a worry.

Predictably today’s profits have seen renewed calls for higher windfall taxes, but with an effective tax rate of 65% already, it’s debateable as to how much extra revenue is likely to be raised by a higher rate, or an extension beyond 2025.

That said departing Shell CEO Ben van Beurden seemed pragmatic about the prospect, which is all well and good since he’s on his way out and won’t have to answer to shareholders beyond the end of this year. It’s also unlikely that future profits will be anywhere near as high as they have been over the last few quarters given the recent falls in energy prices.

We’ve already seen from BP back in August how much extra money is likely be raised from the higher tax rate when they set aside an extra $800m in respect of the higher tax rate by the end of 2025. This won’t go very far in filling the fiscal gap in the public finances, which suggests that a windfall tax isn’t the game changer politicians would like you to think it is.

Given that reality it’s entirely possible that the increasing noise over windfall taxes and “obscene” profits by politicians helps provide a convenient distraction because it shifts the focus away from why oil companies are making the sorts of profits we’re seeing today. If there’s a failure anywhere it’s in the very same politicians who over the last 20 years, have abjectly failed to prepare the UK economy for the energy transition, and it’s their way of shifting the blame for the consequences of that failure away from where it should lie.  

Unilever shares have seen little reaction to today’s Q3 trading update, which saw the consumer goods giant report a 10.6% rise in sales to €15.8bn, with the company raising its sales guidance for the full year. What was particularly encouraging was that the growth in sales came across all of its divisions, although nutrition was by far the weakest, rising by 4.8%, with all the others into the low 20%.

Increase in prices of 12.5%, did prompt a paring back in volumes to the tune of a 1.6% decline. The company said it now expects full year underlying sales growth to be above 8%.

Lloyds Banking Group shares initially slipped back in early trading, after missing expectations on Q3 profits, which fell to £1.51bn, a 26% decline from the same quarter last year, and down a similar percentage from Q2.

The main reason behind the initial decline in the share price was the bank taking the decision to increase its impairment provision by £668m, taking total provision for the year to just over £1bn, as the bank expressed caution over the economic outlook.

Despite the concerns over the outlook the shares quickly rebounded as investors focussed on the better internals and the improvement in margins.

US

US markets slid back yesterday as the underperformance on tech earnings continues to shape the wider narrative despite all the speculation that we could see a slowdown in the pace of rate hikes from the Federal Reserve after next week.

This has prompted a mixed open today with the Nasdaq 100 sliding sharply while the Dow and S&P500 opened higher after US Q3 GDP came in ahead of expectations and weekly jobless claims edged up to 217k.

After the disappointment of Google’s Alphabet numbers and Microsoft, earlier this week, Facebook owner Meta Platforms also let the side down last night.

Meta Platform shares have fallen to their lowest levels since 2016, after the company missed expectations on profits, and lowered its guidance on Q4 revenues to between $30bn to $32.5bn. The Reality labs division continues to haemorrhage cash, with revenues coming in at $285m, and losses coming in higher than expected at $3.67bn. How long before the size of these losses triggers a reality check, on operating expenses? On the plus side at least, its daily active users have remained resilient.

Today is the turn of Apple and Amazon, with some investors clinging on to the hope that Apple will save the day. There is little question that Apple will generate some decent numbers later this evening, however whether they will be enough to prevent a sharp slide is another matter. Expectations have already been reined in after Apple announced it was cutting back its iPhone 14 production due to low demand and focussing attention on the iPhone 14 Pro, where demand seems to be holding up better. We’re not expecting great things from Greater China and Japan where sales have been in decline, so a lot is resting on demand elsewhere in the wake of the September product launch. Profits are expected to come in at $1.26c a share.

Amazon should get a boost from its Prime subscription and its “Rings of Power” mini-series, while AWS is also expected to do well. Amazon’s biggest problem is costs which it is looking to drive down having shed over 100k employees during the quarter. We could also see a return to profit after two successive quarters of losses due to write downs in its Rivian stake. Profits are expected to come in at $0.24c a share assuming no more Rivian write-downs.

Twitter shares are in focus in expectation that Musk’s acquisition of the business will complete today. Musk also said he doesn’t plan to cut 75% of jobs in the business, although he is likely to cut a sizeable percentage.

FX

The ECB raised rates by 75bps as expected, however the forward guidance was interpreted as being much less hawkish than anticipated, prompting the euro to fall back below parity against the US dollar, prompting it to be the worst performer today.

The weakness in the euro was reinforced by the statement which saw an increased emphasis on the risks of an economic slowdown, while also acknowledging that inflation remained too high. The statement also saw the removal of “several” when mentioning the number of rate hikes that might be coming, adding to the dovish interpretation.

Commodities

Crude oil prices have continued to ebb and flow, with prices rising today after the US reported record export numbers for crude oil as well as other fuels. Brent crude prices have risen to their highest levels in over two weeks, as are US WTI prices.

Gold prices showed little if any reaction to the latest set of US economic numbers. The better-than-expected US Q3 GDP numbers prompted a limited response on US yields, and thus while gold prices have slipped back it’s hard to say whether the current rebound might have peaked.

Volatility

Aircraft manufacturer Boeing reported quarterly earnings yesterday, which highlighted a series of challenges faced by the business especially in its defence division. This saw the underlying stock fall by close on 9% during the session, driving one day volatility to 200.5% against 72.09% on the month.

After a quiet couple of weeks, activity on crypto prices has been reignited thanks to a combination of factors. Short covering, expectations of a more dovish approach from the Fed and the fact that the newly elected UK PM is seen as being crypto-friendly have all combined to help drive BTC well above the $21,000 level. One day volatility on bitcoin came in at 55.46% against 42.08% on the month, whilst Ethereum saw even higher levels of price action, with vol printing 83.12% on the day and 52.23% on the month.

EUR/CAD was the standout amongst currency crosses, following a softer than expected rate hike from the Bank of Canada. The market had been eyeing a 75bps increase, but tightening was limited to just half a percent, sending the cross to levels not seen in over four months. One day vol came in at 11.37% against 9.66% on the month.

And amongst equity indices, it’s the Hang Seng that is once again in focus as the Hong Kong index continues to try and rally off those multi year lows. One day volatility here posted 56.54%, up from 38.82% on the month.

 


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