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Travel and leisure help push FTSE 100 to a two-year high

An aircraft taking off

European markets have had another strong session today, with the FTSE 100 setting a new two year high, while the FTSE 250 has also seen strong gains, due to some outperformance in companies who are most exposed to the ebb and flow of the UK economy, and the announcement of a possible easing of Covid restrictions in England, at the end of this month.

Europe

Travel and leisure have once again been out front with TUI, Wizz Air and easyJet helping to underpin the FTSE 250. The prime minister’s announcement that Covid isolation in England rules could end at the end of this month has given a leg up to the likes of Whitbread, Cineworld and Kingfisher, while IAG is also higher, as reports circulate it could be forced by Brussels rules to spin off its UK operation British Airways, due to EU ownership rules.

The last few weeks haven’t been great ones for Barratt Developments with the shares under pressure due to concern over cladding costs. Today’s H1 update has seen the shares move higher despite reporting a 9.9% decline in revenue to £2.25bn. Profits, on the other hand came in higher at £432.6m, as did gross margins, rising to 24.3%. The house builder also raised its full year guidance for home completions by 250.

A bigger than expected draw in US crude inventories also saw BP shares edge into the top half of the FTSE 100 in the late afternoon session

The recent performance in Dunelm shares has been rather disappointing, trading near to six-month lows at the end of last month, as concern over the retail outlook weighed on sentiment. Today’s H1 numbers appear to show that these concerns were probably misplaced with total sales rising 10.6% to £795.6m, with profits before tax rising to £140.8m, a rise of 25.3% from last year.

The retailer also managed to improve its gross margins to 52.8%, although guidance for the rest of the year was kept unchanged. This reluctance to raise the guidance could well be behind today’s relatively tepid share price reaction, although its hard to be critical of management caution given the cost-of-living squeeze set to hit consumers over the course of the next few months.

A decent set of full year numbers for packaging company Smurfit Kappa has seen the a decent read across to sector peers DS Smith and Mondi. Smurfit saw an 18% rise in revenues to €10.1bn while profits before tax rose 22% to €913m.

Markets have reacted coolly to GlaxoSmithKline’s Q4 numbers which saw revenues and profits both come in ahead of expectations. Revenues came in at £9.53bn, while adjusted EPS came in at 25.6p per share. The pharmaceutical division accounts for the bulk of these revenues with £5.22bn while consumer healthcare, the part of the business that Glaxo is looking to sell returning £2.5bn in sales

On a full-year basis sales came in at £34bn, with consumer healthcare accounting for £9.6bn of that number, a decline of 4% year on year. The company said it remains on track to demerge this business by the middle of this year, as CEO Emma Walmsley comes under continued pressure to devote more resource to the pharmaceuticals business, which accounts for just over 50% of the company’s sales. More details about the timeline of the disposal are expected to be outlined on 28th February, including timelines, financials and other deliverables.  

The pharma business currently has a strong pipeline of 21 vaccines and 43 medicines, 22 of which are on pivotal trials, with an expectation to report milestones on 7 potential new vaccines in H1 2022. Guidance for 2022 is expected to deliver sales growth of 5-7%, excluding contributions from Covid-19 vaccine solutions.

US

US markets have surged out of the blocks today, although they remain below the highs of last week, as we continue to look for a broader direction, against a backdrop of choppy trading activity, rising inflation and uncertainty about the pace of Fed rate moves this year.

Tomorrow’s CPI is likely to be the catalyst for the next big move, especially if it comes in below, or above expectations. With so many expecting a number at the higher end of expectations there is a risk that a number in line or below expectations could see stocks take another leg higher.

Ride-sharing company Lyft has seen its shares slip back after its active rider numbers for Q4 came in below expectations. The various Omicron outbreaks across the US appear to have constrained the number of riders as well as available drivers. The company reported 18.7m active users, well below 2019 levels of 22m. On the plus side revenue per rider improved, helping to push revenues up to $970m which was above expectations, however management remained cautious about the outlook saying that they expected Omicron to continue to affect the numbers in Q1.

With Uber set to report after the bell it seems likely we could see similar trends in their Q4 numbers, although they do have the advantage of their Uber Eats business which continues to grow. 

Disney is also expected to report its Q1 numbers after the bell against a backdrop of slowing streaming numbers, after market leader Netflix saw its numbers slow. Investors will be looking for Disney to buck the trend, as well as finding out whether there’s any truth in the rumour that they are interested in Peloton.   

FX

The US dollar has come under pressure, after a strong session yesterday, sliding back across the board.

The pound has briefly retested the 1.3600 area against the US dollar after Bank of England Chief economic Huw Pill outlined his thoughts on the future direction for UK rate rises. While he acknowledged that more were probably on the way, he indicated that the markets were pricing in too steep a pace. He also said there were risks on going too fast and he preferred a much more measured and data dependant approach. This would suggest that another rate rise in March is by no means a certainty, however it would only require 1 more person to join the 4 who voted for a 50 point move for that to happen, so it’s not beyond the realms of possibility.

Commodities

After seeing its biggest one day decline this year yesterday, oil prices have pulled back from their lows of the day after slipping back from Monday’s 7-year highs.  While the prospect of a resumption of talks between the US and Iran is a positive sign and is likely to have contributed to the recent weakness in prices, we remain a long way short of any sort of agreement that might bring about new supply. This may constrain any dips along with declines in US inventories. Last night API inventories saw a bigger than expected draw, as have today’s EIA numbers which saw a draw of 4.76m barrels, well above expectations.

Gold prices continue to look firm, albeit still contained within their recent range of the last few months. With yields still undeniably firm the upside is likely to be limited ahead of this week’s US CPI numbers which are due tomorrow.

Volatility

There was a fair bit of activity in terms of single stock volatility yesterday, with results from the UK’s Ocado and Germany’s TUI both delivering a swathe of price action. However, the real stand out was Peloton, where news of the CEO’s departure and 2,800 other redundancies appeared to draw a line under the stock’s recent slide. The underlying is now up 50% from Friday’s lows with one-day vol at 296% against a monthly reading of 224%.​

As for indices, it was the China A50 that topped out in terms of price action. Whilst sentiment globally seems to be improving off the back of hopes that Russia is pulling back from the brink in Ukraine, at a local level the domestic index rebounded off recent lows, adding almost 3% and making it something of an outlier. One day vol moved up to 37.1% from a monthly print of 28.6%.

That calming of the situation between Russia and Ukraine – along with them as expected 50 basis point rate hike by the Polish central bank yesterday – served to drive activity on the Dollar Zloty cross. One day vol advanced to 10.35% although, given the recent interest in the currency, that’s not too far above the monthly reading of 9.85%.

Cocoa prices remain volatile with bargain hunters moving in after the notable reversion we commented on at the start of the week. Historical price action may mean this is a commodity worth monitoring for further swings. One day vol advanced slightly from Monday to 35.9%, up from 31.5% on the month


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