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FTSE 100 lags as European stocks rise for third day in a row

FTSE100 lags as gilt yields surge

It’s been another positive day for European markets, up for the third day in a row, despite evidence that the broader economy is slowing. The FTSE 100 for its part has done its best to reprise its role as the perennial party pooper, sliding back from its intraday highs, and struggling to close in positive territory. Some of that may be down to the sharp rise in the pound, and sharp rise in gilt yields.

Europe

The biggest loser has been Entain as it gives up some of the recent gains of the last couple of days. We’ve also seen some modest profit taking on utilities and consumer discretionary shares, with National Grid, Severn Trent and United Utilities all softer  

Lloyds Banking Group, Barclays and NatWest Group are amongst the better performers as a consequence of the rise in gilt yields.

Rolls-Royce is also higher after getting an upgrade from Berenberg who said the resumption of long-haul travel, will help it meet its target of 55% for EFH (engine flying hours), which at one point this year it seemed unlikely it would be able to meet. The resumption will certainly help, but Rolls-Royce still remains well short, currently at 43% for H1, with the broker suggesting that free cash flow could top the £1bn mark for 2022, which is above Rolls-Royce’s own estimates of £750m, which they put out in early August.   

Royal Mail provided a positive H1 trading update today, however the shares have struggled to impress. Group revenues rose 8.2% over the same period a year ago, while domestic parcel volume fell by 5%, revenues rose by 4.1% last year, and 44.5% above 2019 levels.

Costs have increased slightly, not surprising given the similar problems being faced by the likes of FedEx earlier this week. Group adjusted operating profit for H1 is expected to come in between £395m to £400m, with H2 expected to deliver a better performance on profits and margins.

Reckitt Benckiser also provided an update on trading for Q3, maintaining its full year guidance, saying that it continues to be optimistic in delivering like-for-like net revenue growth of 0-2%, and operating margins of around 23%. The company confirmed the disposal of its IFCN China business which completed on 9 September.

Harbour Energy’s latest H1 results have seen the shares slide to the bottom of the FTSE 250, after falling short on revenues at $1.38bn, although the company was able to turn a profit after tax of $87m. The company also said it plans to exit its Falklands Sea Lion field, which to date hasn’t brought any oil to market, as it looks to steer the business in a direction, where it can start generating returns. Its Tolmount gas field remains on course to start production by the end of this year.    

US

US markets have picked up where they left off yesterday, opening higher in the wake of yesterday’ s Fed decision, which appeared to set a timetable towards a tapering of asset purchases. Both the Nasdaq and S&P500 look set to move back above their 50-day MA’s the breaking of which appeared to prompt the recent sell off.

US weekly jobless claims were a little disappointing, unexpectedly jumping to 351k and a four-week high, while continuing claims rose to 2.85m. The latest manufacturing and services PMI flash readings saw a slight softening in September; however, they were still fairly resilient.  

The Feds tilt towards laying out a timetable for the pulling back of stimulus measures appears to be being taken quite calmly, despite the prospect of the bond buying program ending by the middle of next year.

Salesforce has seen its shares rise after the company raised its 2022 revenue outlook to a midpoint of $26.3bn, up from around $26bn.

Olive Garden owner Darden Restaurants has managed to shrug off the effects of higher costs in its latest Q1 numbers, reporting profits of $1.76c a share, posting sales of $2.31bn, a huge jump from $1.53bn a year ago. Darden says it expects to see higher profits of $7.45c a share, while full year sales are expected to come in at $9.5bn. That’s a lot of breadsticks.

Nike’s latest numbers are due out after the bell, with expectations over Q1 tempered by concerns over supply chain issues. The numbers in Q4 beat expectations, however it is clear that this quarter won’t have the tailwinds that boosted the end of year numbers.

FX

In the wake of yesterday’s Fed meeting, we’ve seen further central bank announcements today, with the Swiss National Bank leaving rates unchanged at -0.75%, while Norway’s Norges Bank raised its own benchmark rate by 0.25% from 0% to 0.25%, while also saying it expects to raise them again in December.

The pound also got a healthy bid after the Bank of England meeting earlier today, after the central bank said it saw a stronger case for tightening, while saying that inflation could well push above 4% by the end of the year.

We also got another dissent for the continuation of bond buying with Dave Ramsden joining Michael Saunders in calling for a reduction to £840bn, from £895bn. This change of stance has prompted markets to pull forward expectations of a rate hike to March next year, pushing UK gilt yields up sharply, with the 2- and 5-year yield jumping back to levels last seen in the week before the March 2020 lockdown, with the 2-year yield seeing its biggest one day rise this year, of nearly 10bps.

The US dollar is one of the worst performers, despite last night's pivot towards tapering, however this weakness is likely down to the fact that it was already priced in.  

Commodities

Oil prices have continued to edge higher, as oil stocks continue to decline. With demand remaining high and as we head into winter, there is some concern that some producers may not be able to ramp up production as quickly as they would like. Today’s weakness in the US dollar is also helping to underpin prices.

Rising yields are also acting as an anchor on gold prices, as they edge back towards last week’s close, giving all their early week gains.