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Diageo hangover weighs on the FTSE100

European markets have seen a positive session today, although the FTSE100 and DAX have underperformed when it comes to its peers, with the CAC40 and FTSEMib much more resilient. 

Europe

Diageo shares have slipped to the bottom of the FTSE100, and their lowest levels since June last year, despite seeing net sales in H1 rise by 18.4% to £9.42bn, although sales volumes were lower. Operating profits also rose strongly, helped by higher prices and resilient demand for its premium brands which accounted for 57% of total sales.

On guidance Diageo kept this unchanged with an expectation to deliver organic net sales growth of between 5% and 7%, through to 2025. Today’s share price weakness appears to be driven by concerns over the outlook in its North American market, and a sharp decline in operating margins of 206bps.

Staying on the drinks theme, Fevertree has also slipped back despite reporting an 11% increase in full year total revenues to £344.2m. This was driven primarily b a 23% increase in its US business which saw revenues of 95.6m. The UK business saw revenues slip to £116.2m a decline of 2% with the company blaming railway disruption in the run-up to Christmas which impacted on sales, while adjusted earnings are expected to fall to between £36m and £42m. Management have expressed confidence that they can deliver 2023 revenues in the region of £390m to £405m, despite rising energy costs in the manufacture of glass bottles, which are expected to reduce profitability by £20m in the current fiscal year

Travel and leisure have been more of a mixed bag today with Wizz Air shares falling heavily after the airline admitted that it still expected to see losses in 2023 but was optimistic that 2024 would be different. Q3 revenues rose to €911.7m a rise of 123% as operating losses narrowed to €155.5m. The rebound in the euro helped to offset some of the effects of rising fuel prices, to the tune of €220m,  helping to push the airline into a Q3 profit of €33.5m.

On the other hand, Jet2 shares have pushed higher, as like easyJet yesterday, the travel company reported strong forward booking volumes and that load factors compared to pre-pandemic are slightly ahead on higher margins and pricing. Consequently, the company has said it expects to exceed market forecasts for the year ending March 2023 and report a group profit of between £370m and £385m.

For 2024 the outlook was similarly upbeat with seat capacity this summer currently 6.6% higher than last year. 

On the plus side the best performer is 3i Group rising above its highs last year, after reporting Q3 numbers that came in ahead of forecasts. Net Asset Value saw an increase to 1,649p and a total return of 26.8% so far year to date.

Also doing well is Prudential after the insurer announced it had received regulatory approval to open an office in Macau.

International Distribution Services shares are modestly higher despite the admission that the Royal Mail strikes have cost the business £200m. The Royal Mail business saw revenues decline by 12.8%. The declines in business weren’t just in letters, which fell 6.1% but in parcels which saw a 17.8% fall, with volumes also lower by 20%. Year to date, Royal Mail operating loss is running at £295m, and is expected to rise to between £350m and £450m for the full year, assuming no further strike action. The GLS business is performing better despite a 2% decline in volumes, with revenues rising in both sterling and euro terms by over 9.5%.    

US

After pulling off their intraday lows yesterday and closing more or less unchanged US markets opened higher after the latest US Q4 GDP numbers showed the economy expanded by 2.9%, while weekly jobless claims fell again to 186k from 192k the week before.

If there are any concerns that the US economy in on the brink of a recession it’s certainly not being reflected in the economic data, which still looks reasonably solid. This may well give the Fed some pause next week when it comes to looking at whether to hike rates by 25bps or do a more aggressive 50bps. While 25bps has been widely trailed as a nailed-on certainty we could find that it is accompanied by very hawkish forward guidance. It certainly nails any prospect that the Fed might be minded to signal a pause.

Tesla shares slipped into a higher gear, opening sharply higher, after reporting a 51% rise in total revenues to $81.5bn, of which $71.46bn was automotive sales. Automotive gross margins in Q3 came in at 27.9%, and fell to 25.9% in Q4, a decline of 466bp year on year. Despite the pressures from rising costs gross profits rose by 13% year on year to $5.5bn in Q4. Tesla also confirmed that it remained on track to build its new Cybertruck in Austin later this year.

Concern over margins appears to have been deferred for the time being despite a decline in annual automotive gross margins to 28.5%. On a full year basis operating margin improved to 16.8%, despite a 2% rise in operating expenses.

Annual free cash flow also increased by 51% to $7.5bn, with CEO Elon Musk expressing confidence that, while the aim for Tesla was to make 1.8m vehicles this year, a figure of 2m was possible. Musk went to great lengths to assure investors about demand saying that orders had been coming in at twice the rate of production since the recent price cuts were announced. On automotive gross margins it is expected that they should stay above 20%, however this forecast does have a huge element of uncertainty around it.

IBM shares have slipped back despite beating expectations on Q4 revenues at $16.7bn, with decent growth across software and infrastructure divisions. Gross margins also came in better than expected at 58.6%, however there appears to be some disappointment over its free cash flow numbers for Q4, which were a little on the light side. Despite this concern the outlook for cashflow looks strong, with a forecast of $10.5bn. IBM also said it was looking to cut 3,900 jobs to keep a lid on costs and preserve its margins. 

US airlines have been a mixed bag today, with Southwest Airlines down sharply after announcing a bigger then expected loss for Q4 as well as a loss for the first quarter of next year. This was due to a litany of IT problems in December. Q1 revenues are likely to be $350m lower because of ongoing cancellations and problems as a result of the December disruptions. American Airlines on the other hand is higher after upgrading its profit estimates for 2023 to between $2.50c and $3.50c a share.

US oil giant Chevron shares have shot higher after the company announced it plans to buy back $75bn in shares starting from April 1st, as well as hiking its dividend pay-out. With oil earnings season set to get underway in earnest in the next two weeks this announcement will be akin to a red rag to a bull to those who insist that oil companies aren’t doing enough to help with the renewables transition. The Biden White House has already responded with a broad side at Chevron management, criticising them for a lack of investment in new supply.      

FX

The US dollar is having a reasonably good day after the latest economic numbers showed the US economy looks solid despite the rise in interest rates over the last 12 months. Today’s data also offers a couple of strands to next week’s Fed meeting, with the economy in better shape than feared, and that demand is likely to hold up which is positive for company earnings. On the flip side of that is it means the likelihood of a Fed pause or pivot is less likely, and even though we still look set to see a 25bps rate hike next week, there could be more to follow.

The Japanese yen is amongst the worst performers, while the euro has also slipped away from the 1.0900 area, failing again to gain a foothold through 1.0930.

Commodities

Crude oil prices are back on the rise again after the latest US Q4 GDP numbers and weekly jobless claims numbers showed the US economy is still in pretty good share, despite higher prices and high inflation. The resilience of today’s data also helps to reinforce the “soft landing” narrative that markets are hoping will mean that any sort of recession or slowdown is avoided.

Gold has taken a bit of a tumble on the back of today’s rebound in the US dollar and the move higher in US yields after today’s economic numbers. 

Volatility

Despite something of a mixed bag in AT&T’s earnings, investors took the glass half full approach on Wednesday, pushing the stock around 6.5% higher on the day. Following a slightly erratic spell in early trade, one day volatility came in at 280.22%, up from 93.41% on the month.

A modest overshoot in Australian inflation data served to bolster the Aussie dollar yesterday, with the fall-out here being especially noticeable against Sterling. That was also driven by renewed recession fears in the UK, although downside proved difficult to sustain. The pound lost a little over two cents at one point before reverting, but that left daily vol on the cross at 12.5% against 10.12% for the month.

Underwhelming earnings news and read across from Wall Street was also seen as being behind the FTSE-100’s rocky session, although a recovery in sentiment in the US did mean the worst of the losses had been recovered by the close. One day vol on the London index came in at 10.81%, a fraction up on the monthly print of 10.79% although for a rather more turbulent experience, the NASDAQ printed daily vol of some 23.13%.

And that turmoil on Wall Street also pushed CMC’s proprietary basket of remote lifestyle stocks into focus yet again. The basket, including the likes of Domino’s Pizza, FedEx, and Peloton, ended the day slightly ahead, despite having traded meaningfully lower mid-morning. One day vol here came in at 51.01% against 42.57% for the month.


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