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Sanction’s fault lines and peace talk chatter helps markets rebound

Ukraine, Russia flags

European markets have seen a sizeable rebound today, as fault lines over sanctions, particularly amongst some EU members took some of the bite out of yesterday’s actions by the US and UK.

Europe

The decision to leave out energy from the sanctions list is in some way understandable, given the global economic impact that might have, however other carveouts like luxury goods and items for the likes of Italy and Belgium come across as harder to stomach, and make a complete mockery of the whole sanctions process.   

Today’s recovery was given extra impetus on reports from the Kremlin that Russia was open to sending a peace delegation to Minsk. This seems highly odd, given Putin’s commentary this week, but it hasn’t stopped markets hoping that there might be something in it. For a start, why would Ukrainian negotiators go to Minsk. Belarus is hardly impartial in this fight given Lukashenko’s close ties with Moscow. It was then reported that Ukraine wanted a neutral venue like Warsaw, but then broke off contact. raising the question as to whether this was simply propaganda.     

The FTSE100 has led the way, although we remain short of wiping out yesterday’s losses, rebounding back above 7,400, and are still set to finish the week lower, with the DAX lagging behind today’s rebound.  

The change of tone today is no better reflected than in today’s share price performance in Russian miners Evraz and Polymetal which have seen a decent rebound today, after big falls yesterday.   

Today’s full year numbers from British Airways owner IAG paint a sobering picture of the airline’s finances over the last 12 months, with the airline operating at 36% of 2019 capacity over the full year.  

A full year loss after tax of €2.9bn follows on from last year’s €7.45bn deficit and while a significant improvement still highlights the extent of the challenges facing the sector. The return of transatlantic travel in November last year did improve the Q4 performance, with a loss of €278m, compared to a €1.48bn loss over the same period a year ago.

That said passenger revenue for 2021 was only 5.9% higher than the levels we saw in 2020, coming in at €5.8bn.

Current passenger capacity plans for 2022 are for 65% of 2019 levels for Q1, rising to 85% over the rest of the year. With respect to the outlook the airline said it expects to return to operating profit in Q2, assuming no further Covid-19 restrictions, or other setbacks.

The company’s finances still remain under pressure given two years of sizeable losses, with the airline mulling further ways of raising additional funds, including the possible sale of planes, or its cargo unit. Its interesting to note given EU concerns over IAG’s ownership structure that management aren’t looking at the sale of its British Airways brand and spinning that off, due to French and German pressure over its ownership structure.

Since BA became part of IAG in 2012 the airline has lost a lot of its cachet and become a bit tired. As a stand-alone entity, it might rediscover its mojo as the so called “World’s Favourite Airline”  

We’ve also seen decent rebounds for the likes of Wizz Air, easyJet, and the big European carriers after yesterday’s falls, while banks which also got clobbered yesterday have also rebounded as the net effect of any sanctions is absorbed and put to one side.

It should be noted that the rebound in European banks is slightly more modest relative to the declines seen yesterday, which suggests today’s rebound is more of a relief rally than any sense we’re out of the woods.

The UK property market was on fire last year and today’s numbers from Rightmove appear to reflect that, with revenues coming in at a record £304.9m, a 5% increase on 2019 levels, while operating profits also increased to £226.1m, a rise of 6%. On the outlook the company took a positive stance saying it intends to keep costs down to 25% of revenues, with the shares moving sharply higher on the day.

Digital education company Pearson is also seeing decent gains today after reporting full year results in line with expectations. Adjusted operating profits came in at £385m a rise of 23%, while revenues came in at £3.43bn.

US

US markets have opened modestly higher, heading into the weekend at the end of what has been another volatile week, with the Nasdaq 100 lagging behind having led yesterday’s rebound.  

The latest PCE inflation numbers showed little sign that price pressures in the US economy are diminishing, keeping alive the prospect, geopolitics notwithstanding, that we might see a much more hawkish Fed when they meet next month. Personal spending was also strong, rising 2.1% in January against a backdrop of PCE inflation of 6.1%.

Investors don’t seem to be that impressed with Coinbase latest numbers for Q4, pulling in $2.5bn in revenues, well above expectations. Net income also came in ahead of expectations at $840.2m, as EPS soared to $3.92c a share. For Q1 the guidance was disappointing with management saying that they expected trading volume to decline at the start of its new financial year.   

Beyond Meat shares are also under pressure after reporting a bigger than expected Q4 loss, as well as issuing disappointing guidance. Q4 revenue came in slightly below expectations, while losses widened to $62.9m, against expectations of a loss of $34.1m. Grosso margins fell sharply to 14.1%, well below expectations of 24.4%. Its full year guidance was for revenues of $560m to $620m which while wide was also below consensus forecasts of $645m.   

On the plus side online market place Etsy has seen its share rise sharply after reporting better than expected Q4 numbers. Revenues came in at $717.1m well above expectations, and EPS of $1.11c a share. Its Q1 guidance was a little disappointing, but that doesn’t appear to be phasing investors for now.    

FX

The US dollar has been one of the main beneficiaries of this week’s market turmoil hitting its highest levels since May 2020 against a basket of currencies, although it has slipped back from its peaks heading into the weekend.

The pound has been particularly weak over the past few days, perhaps due to outflows as a result of sanction concerns, as well as the prospect that the Bank of England might delay another interest rate rise given current events.

The Australian dollar has outperformed this week, ahead of next week’s RBA meeting, and the fact that the Australian economy stands to benefit greatly from the increases we’ve been seeing in commodity prices. The rise in global inflation expectations could also signal a hawkish shift from the Australian central bank when it meets next week, particularly since they will have to bring forward expectations of a possible rate hike into this year.

Commodities

The rise in US treasury yields today, along with the more positive vibe in equity markets has seen gold prices slide back further, after yesterday’s spike up to $1,970 an ounce. We’re now back below $1,900 with the prospect we could actually finish the week lower.

Crude oil prices are also drifting off after yesterday’s spike to new 7-year highs, amidst the admission by the US administration that they don’t want sanctions to disrupt the global economic recovery, and as such energy prices will not be targeted.

We’ve also seen wheat and corn prices slip back today, although both still remain very much higher on the week, over concerns about disruption to global grain production.  

Volatility

There are no surprises in terms of where the price action was seen yesterday in the wake of Russia’s invasion into Ukraine. For fiat currencies, the Dollar Ruble pair at one point appreciated as much as 10%, driving one day volatility to almost 140% against a monthly print of 46%. Although the Ruble did later retreat from those record lows, punitive sanctions will keep the currency very much in focus over the coming days.

Oil punched through that key psychological level of $100 a barrel yesterday, with the result that volatility spiked, too. The WTI contract saw one-day vol reach 63%, up from a monthly figure of 41%, whilst Palladium’s advance to six-month highs also drove interest in the precious metal.

The Warsaw stock market slumped a further 10% on Thursday amidst concern over the impact events in neighbouring Ukraine would have on the country’s economy, along with what is seen as inevitable hikes in energy prices. That’s going to take a toll on broader growth and yesterday’s lacklustre bond auction by the country’s central bank did little to bolster enthusiasm. either. One day vol on the Polish 20 reached 99%, up from the monthly print of 44%.

As for cryptos, the sell-off in bitcoin may have been the headline grabber, but IOTA saw some wild price action yesterday too, sufficient to drive one-day vol above 560% against a monthly print of 143%. Then rounding off with single stocks, those big, London listed Russian plays were in focus with Polymetal’s daily vol reaching 638% against a one month reading of 194%, whilst Evraz printed 321% against 121%.


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