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Shell drags on the FTSE 100, as Lloyds beats expectations

Refilling at a Shell petrol station

European markets have had a mixed session today, with the FTSE 100 and DAX lagging the rest of Europe. The UK index has underperformed due to weakness in the oil and gas sector, while the DAX has been dragged by Volkswagen, after the company reduced expectations on full-year revenues for its autos business due to supply shortages of key components.

Europe

The way we’ve seen oil and gas prices rise this year, you would expect the oil majors to reap the benefits of this cashflow bonanza to help them buy time as the global economy attempts the transition to renewables over the next decade or so. Unfortunately, they seem to be wasting that opportunity if today’s Q3 numbers from Royal Dutch Shell are any guide.

The Shell share price has slipped back after adjusted earnings for Q3 came in at $4.13bn, well below expectations of $5.42bn. Today’s number is a particularly poor outcome, even if you factor in the disruptions from Hurricane Ida, which cost the business $400m, as well as higher costs elsewhere, when natural gas prices are at record highs in Europe, and at multi-year highs in the US. While the company said that Q4 would see a better performance due to lower maintenance costs, that hasn’t stopped activist investor Dan Loeb’s Third Point Group calling for the breakup of the business, after taking a $750m stake in the business.

The suggestion is, to split the legacy business away from the renewables and marketing unit appears to have garnered some support among some shareholders. The premise is that Shell is trying to serve two masters, and that you can’t be all things to all people, which in most cases is probably true, however life is rarely that simple. The problem with this argument is that the legacy business needs to fund the transition to renewables, so there inevitably needs to be an element of crossover between the two, which suggests that any such split may be difficult to achieve. On the plus side, the involvement of Third Point will hopefully sharpen management’s focus on the task at hand.

WPP has also impressed with a stellar Q3 trading update which saw a 15.7% rise in like for like revenues less pass-through costs, to £2.64bn, helping to push a 12.6% improvement year to date. All regions of the business showed decent growth, even though the Australian business lagged a little. The company raised its full year guidance again.

Darktrace shares have also continued their recovery after its broker inspired big sell off earlier this week.

Lloyds Banking Group's share price got an early lift after seeing profits in Q3 blow away expectations, however it was unable to break through the June highs above 50p that we saw in the summer, despite profit after tax coming in at £1.6bn, almost £1bn higher than a year ago. Today’s numbers also helped push profits year-to-date to just shy of £ 5.5bn, with the bank adding back £84m in terms of loan loss provisions, helped by the improved economic outlook, taking total impairments added back to £740m year to date. The bank also upgraded its guidance on the improved economic outlook, suggesting the potential for further share price gains in the coming weeks. 

US

US markets have seen a modest rebound after yesterday’s pullback in the S&P 500 and the Dow, as markets mull over the latest US Q3 GDP numbers, and weekly jobless claims data. On the plus side, weekly jobless claims came in at 281k, slightly below expectations, however even more encouragingly continuing claims fell further from 2.48m to 2.24m people and a post lockdown low.

While US Q3 GDP was more disappointing, slipping back from 6.7% to 2%, missing expectations of 2.6%, personal consumption wasn’t as weak as forecast, slipping back to 1.6% in Q3 from 12% in Q2, but beating the consensus of 0.9%.

On the earnings front Ford saw its shares open sharply higher after Q3 revenues and profits both beat expectations. Revenues came in at $35.7bn, while profits came in at $0.51c a share, which while below last year’s levels, was still much better than forecast. As a result of the better-than-expected performance Ford raised its earnings guidance by $1.5bn to between $10.5bn and $11.5bn, as well as saying that it would resume the dividend of $0.10c a share. The improvement in fortunes has been because of much higher selling prices, which are outweighing the higher costs of securing parts, notably semi-conductors. 

On the downside eBay shares have slipped back despite a decent set of Q3 numbers, which saw revenues and profits moderately beat forecasts, however disappointing guidance appears to have seen the proverbial rug pulled out. Revenues for Q4 were seen at between $2.57bn and $2.62bn with the consensus being $2.65bn. 

FX

The US dollar has slipped back across the board after US Q3 GDP slid back more than anticipated to 2%, although inflation rose to 5.7%, so you pay your money and take you choice as to what markets are focussing on today.

The euro has moved higher after ECB president Christine Lagarde didn’t push back strongly enough on market pricing expectations that rates could rise next year. She did say that particular interpretation wasn’t in line with the ECB’s analysis, but wasn’t prepared to comment on whether market interpretations were correct, saying that it wasn’t for her to say. This seemed a rather strange thing to say given the central banks role is to do exactly that. That’s why it’s called forward guidance, and her failure to push back on the market narrative with more conviction has seen the euro move to one month highs against the greenback. It’s almost up there with her “we’re not here to close spreads” comment when she first took over as President.

She did go on to say that inflation was likely to be more persistent than originally anticipated and that the PEPP programme would be ending as scheduled in March 2022.

Commodities

Crude oil prices look set to post their biggest two day decline in over a month after bigger than expected builds in weekly oil inventories, raised the prospect that recent rises in prices had created an element of demand destruction.

Some have suggested that the resumption of Iran nuclear talks has also helped contain the recent rise, but this seems unlikely given the time lag between any agreement, and supply returning to the market.

The weaker US dollar has seen gold prices edge back up again after finding support at the $1,780 level earlier this week.


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