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Barclays beats expectations, but it’s a low bar

Investor optimism has continued to grow over the past week or so that China and the US will be able to arrive at a compromise that will avert an escalation to the current disagreements over trade between the two parties.

At the end of last week, we heard reports that the two sides were working towards a memorandum of understanding which would outline the areas for discussion, with a view to that being ratified along with an extension to the March 1st deadline, in order to create a framework for further discussion.

It is reported that there will be six memoranda on issues such as intellectual property, agriculture and currency to name but three.

This rising optimism has seen markets in Europe push to their best levels this year, as well as multi-month highs this week, and has seen markets in Europe opening cautiously higher this morning, though the FTSE100 is lagging somewhat.

There is still widespread concern about how well the economy in Europe has been performing in recent months, and recent PMI’s from France and Germany have been consistently disappointing in recent months.

This morning we have seen some evidence of an improvement in the French numbers as the flash readings for both services and manufacturing showed a pick up this month. Manufacturing rose slightly to 51.4, from 51.2, while services improved from January’s shocker of 47.8, to come in at 49.8, still in contraction territory, as the French economy continues to be rocked by unrest.

In Germany the opposite appears to be the case after manufacturing cratered to 47.6, from 49.7, as weak export markets caused order books to decline at their fastest levels in over six years, though services did improve to 55.1, from 53.1.

On the earnings front we got to see the latest full year numbers from Barclays, in the wake of well received numbers from its peers Lloyds Banking Group and Royal Bank of Scotland in recent days.

Earlier this week Barclays management had to contend with the news that Tiger Global, one of its major shareholders had sold down its $1bn stake in the bank, in what could hardly be called a resounding vote of confidence in the direction of the bank. Senior management have already come under pressure to sell off the underperforming investment banking division by another activist shareholder, Edward Bramson, and the departure of Tiger Global could well see Bramson step up these calls, particularly since the investment bank has once again underperformed.

The first half of the year was disappointing due to a £1.4bn fine to US regulators which helped pull profits down to £1.6bn in H1, however Q3 profits came in at £1.5bn up £400m from the year before.

Without the various fines, profits could have been expected to come in well above £5bn, after the improvement seen in Q3 raised optimism that we might see a catch up in Q4 This optimism proved to be well founded and this week’s full year numbers show that profit before tax, excluding litigation and conduct rose 20% to £5.7bn, however once all of these had been stripped out net profit came in at £1.4bn, still an improvement on the £1.9bn loss last year.

The bank also set aside £150m in respect of Brexit risks, while the performance of the investment banking division is unlikely to assuage management concerns that they are likely to come under pressure to make efficiencies there. Equities was the only division to improve on revenues, with FICC, corporate lending and banking fees all showing declines from their performance in 2017. While this is a little disappointing it compares favourably with a lot of its European peers whose investment banking divisions have struggled much more in recent months.

This may help explain why the shares have shot higher on the open, beating a low bar is always welcome, though the pledges by management to supplement dividends with additional cash return, may well have helped as well.

British Gas owner Centrica’s numbers were also disappointing coming in below expectations, with management blaming a challenging external backdrop, with the new energy price cap prompting an exodus in consumer accounts. While revenues increased by 6% to £29.7bn, operating profit fell short of forecasts at £1.39bn. The company is also being hurt by increased maintenance costs on its UK nuclear reactors.

In an attempt to free up extra cash the company announced they would be looking to sell their US franchise home maintenance business Clockwork for $300m.

UK defence contractor BAE Systems results are a bit of a mixed bag, despite a big jump in its order book. Revenues were down from 2017 to £16.8bn, even if operating profits improved slightly to £1.6bn.

Cashflow saw a big decline, almost halving from last year, and that may raise some concerns, though management have guided that this is only temporary.

The company was positive about the outlook despite challenges around the German arms export ban to Saudi Arabia, and this caution has seen the shares fall in early trade.

Last night’s Fed minutes pretty much confirmed what most people had suspected, that the central bank was close to ending the reduction of its balance sheet program, while also indicating that holding rates where they are for now posed few, if any risks. The minutes had little if any effect on either US yields or the US dollar for that matter, while the pound continues to be buffeted by the ongoing political instability at Westminster, as well as speculation that we could see a vote on an amended deal next week.

US markets look set to open higher later today as optimism about a trade accord continues to improve.


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