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News

European markets rebound after yesterday’s rout

European stocks get a respite

European markets initially started the day higher, as some tentative buying emerged after yesterday’s sharp selloff. We did see a drift back into negative territory ahead of the US open, however we’ve since recovered off those lows with the FTSE100 attempting to revisit its early morning highs, as we head into the close, above the 6,920 level.

Europe

Cyclicals are leading the move higher, with gains for basic resource and industrials leading today’s rebound.

Anglo American’s Q2 update provided further detail on the disposal of their thermal coal assets, which saw the disposal of their operations in South Africa completed, and the announcement of the sale of the 33% stake in the Cerrejon mine.

The rest of the business saw decent increases in rough diamonds and platinum, with only modest rises in iron ore, which rose by 6% and copper by 2%.

BHP shares are also on the up after the company announced that it had shipped a record amount of iron ore in its latest production report. It was also being reported that the company was looking for a buyer for its oil and gas business, as it looks to exit the fossil fuels market.

It was a good quarter for Swiss bank UBS, who reported a 63% jump in net profit due to a decent performance from its wealth management division, which contributed a 47% rise in profits to $1.3bn. Total net profits attributable to shareholders came in at $2bn. Like its US counterparts the bank saw a slowdown in trading revenues, but all other divisions appear to be firing on all cylinders. 

Airlines saw some big losses yesterday on concerns over a virus resurgence, with European carriers worst hit. Today’s numbers from easyJet don’t make comfortable reading, although the losses are lower than expected. 

When easyJet reported a H1 loss of £701m in May, the company said the outlook for Q3 wasn’t expected to look much better with the airline saying it only expected to fly around 15% of its 2019 capacity. As it turns out the company flew 17% of capacity in Q3, which makes three successive quarters of capacity below 20%. We saw total revenues rise to £212.9m compared to last year’s really low bar which saw £7.2m, while the quarterly loss came in at a hefty £318.3m.

This was still better than expected and was largely helped by reducing costs and cash burn to £34m per week on average. As regards Q4 the airline was slightly more upbeat, saying that they intended to increase capacity to 60% of 2019 levels, especially on the more popular routes.

easyJet also said it had paid a further £122m of customer refunds during the quarter, along with vouchers to the value of £230m. The airline declined to offer any guidance for the remainder of the year, with the shares broadly unchanged on the day.

British Airways and Aer Lingus owner IAG didn’t get much respite either due to the US CDC putting the UK on the do not travel list, nixing any immediate prospect of a transatlantic travel corridor opening.

Rolls Royce shares, which have taken a battering in recent days due to concerns about flight hours revenues, are doing well today after Citigroup enthused a positive outlook for the company once the wide-body flying market recovered, indicating that in the long term it offered significant value.

Having only recently completed its listing on the UK market, Wise today announced that Q1 revenues in line with expectations. Revenues came in at £123.5m, a rise of 43% from a year ago. The company also announced it had launched in India, while also announcing partnerships with Google Pay, and other third parties to make international money transfers.

The prospect of a private equity bidding war for supermarket Morrison appears to have dissipated this morning after Apollo, who it was speculated might have been tempted to gate crash the Fortress approach, said they were in talks with Fortress about joining the bid.

Ocado shares have continued to look weak in the wake of yesterday’s declines and the weekend fire at one of their automated fulfilment centres.

US

US markets got off to a bit of a subdued start after some mixed housing starts and building permits data for June. Housing starts saw a decent gain of 6.3%, well above expectations, however building permits were disappointing, declining by -5.1%, and for the third month in succession. The weakness in permits is especially worrying, however it could also be a hangover from the recent sharp rise in building materials which saw lumber hit a record high in May. Since those peaks lumber prices have plunged, which in time should bring builders back into the market. 

IBM’s latest Q2 numbers showed a decent rise in sales over the quarter largely driven by its cloud business, pushing revenues up to $18.7bn, above expectations of $18.3bn. This was a significant improvement on Q1, pushing H1 revenues up to $36.5bn.

Netflix is also in focus ahead of its Q2 results later today. In Q1 the company posted a big miss on Q1 subscriber growth, coming in at 3.98m users, considerably short of the 6m expected. Consequently, the company dialled back expectations for Q2 to 1m, sending the shares sharply lower. This seemed a little bit of an over reaction given that revenues held up well, coming in at $7.16bn, while Q2 revenues were estimated to come in at $7.3bn. We also need to keep an eye on operating margins which rose to 20% in Q1, while the company said it still expects to come in cash flow positive for the full year.   

FX

The US dollar index has pushed above 93 for the first time since April, and a three-month high, pushing the euro to a three-month low, ahead of this weeks ECB rate meeting which is due on Thursday.

The pound has also slipped back, giving up all its gains for this year, and looking vulnerable to further weakness after breaking below the 200-day MA yesterday. A move below 1.3570 and February lows, could well signal further declines towards the 1.3100 area.

The recent change in sentiment around sterling has been even more surprising given the success of the vaccine rollout plan, however the recent missteps by the government in terms of communication policy, and the economic reopening, appear to have knocked confidence in the UK recovery story, and prompted a bit of an unwind in sterling long positions.

How much further we fall is likely to depend on whether the vaccine wall holds back the worst effects of the rise in Delta infection rates, in the coming days and weeks. A semi-competent government which is able to offer clear messaging wouldn’t hurt either. 

Commodity currencies are also underperforming with the Norwegian Krone and New Zealand dollar suffering the most. 

Commodities

Oil prices have continued to slide after yesterday’s big falls, as concerns about the economic outlook, in the face of rising infections, weigh on the demand outlook. A higher US dollar is also acting as a drag on prices.

We’ve seen fresh 5 month lows in the US 10 year yield today and that appears to be helping to underpin the gold price, which is retesting the 200 day MA, and needs to move above the $1,840 level to signal a test of the peaks seen a couple of months ago.

Bitcoin prices are increasingly looking soft, with the today’s move below $30k potentially opening up the prospect of a move towards $25k.

Copper prices are enjoying a bit of a rebound after yesterday’s big falls, however, there does appear to have been a change of emphasis in the past few weeks suggesting the potential for further falls, as demand continues to slow.