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Unilever drags on the FTSE 100, as US jobless claims rise unexpectedly

A close-up for Unilever's logo

We’ve seen another broadly positive day of gains for markets in Europe today, although the FTSE 100 has once again underperformed, held back by underperformance in some of its big-cap stocks.

Europe

Meanwhile, over in Frankfurt the European Central Bank added flesh to the bones of its new guidance model, even as concerns rise over the wider European recovery story.

This afternoon’s ECB press conference didn’t really add much to the sum of overall knowledge of what we didn’t already know; that the ECB is going to be ultra-accommodative for a long time to come. If anything, today’s tweak to the guidance was the equivalent of giving a rather battered old car a new paint job, and a quick engine tune-up.

If this week’s price action has shown us anything it’s that markets appear to be caught in a pincer movement between concerns over rising inflation, and slowing growth, and that looks set to continue.

This is no better reflected in the latest numbers from Unilever, which have weighed on the FTSE 100, as steep rises in costs hit its operating margins, although some of the effect has been mitigated by the company rising prices. Underlying profit margins fell 100bps in the first half of the year.

Despite the rise in costs the company saw underlying sales rise by 5.4% in the first half, though the growth in Q2 showed a slowdown from the levels seen in Q1. Despite the rise in costs management maintained that the company would still be able to deliver underlying sales growth in the second half of the year.

The rise in costs shouldn’t have been too much of surprise given all the headlines about rising commodity prices and while the erosion of margins is disappointing its not the end of the world that today’s share price falls would suggest it is given they are still at a healthy 18.8%. Sector peer Reckitt Benckiser has also fallen back in sympathy.

NatWest Group shares have also taken a tumble on reports that the UK government is looking to reduce the size of its stake in the bailed-out bank further. The government’s stake is now at 54.7% and it plans to reduce this to well below 50% in the next 12 months. Despite this year’s tribulations for the UK economy both Lloyds and NatWest have performed very well, with both up over 20% year to date. A further dilution of the government’s stake

Centrica shares have seen a modest fall despite seeing a big jump in statutory operating profits, to over a £1bn, and an improvement in cash flow in the first half of the year. Most of this was driven by rising energy prices, with adjusted profits before tax rising to £166m, a rise of 19%. The owner of British Gas has also seen a decline in residential customers of 2%, while also reducing headcount by 7%.

Darktrace shares have plunged on the news that shareholder Mike Lynch lost his appeal against extradition to the US on fraud charges. While Mr Lynch will probably appeal, it once again raises the concern that, as a key shareholder in the company through his Invoke Capital Fund, any fallout from Lynch’s problems with the US could prompt an unwelcome distraction for, and on the business, and Lynch’s involvement in it.  

The travel sector has managed to hold up well today, holding on to its recent gains with IAG, Ryanair and easyJet all set to post their third successive day of gains, and now in positive territory for the week.

Also doing well are Flutter Entertainment and Entain, both higher after RBC upgraded the former to outperform.

US

US markets have stalled a touch after US weekly jobless claims rose by 419k, a much higher number than the 350k expected, raising some concerns about the rebound in the US labour market.

It’s been a more mixed day for US travel stocks with American Airlines outperforming after reporting a surprise Q2 profit, due to an improvement in domestic travel demand. The airline was more cautious about its outlook for Q3 saying it expected revenues to be 20% of 2019 levels. Southwest Air was equally as cautious about the outlook, prompting some profit taking on this week’s rebound in US airline stocks.  

Didi Chuxing has seen further falls on the US open on reports that Chinese authorities are set to impose a serious penalty on the business in the wake of its recent US IPO. The decision to IPO appears to have been taken despite concerns expressed by Chinese regulators, and that any penalty could come in the form of a fine or a forced delisting.

The extent of the breakdown in relations between Didi and Chinese regulators also helps explain the decision by TikTok owner ByteDance to pull its US IPO earlier this month.

Twitter is also set to announce its latest Q2 numbers later today with the main focus set to be on its revenue. In Q1, revenue fell to just over $1bn, from $1.29bn in Q4. To justify its current valuation the company needs to return to profit as well as significantly improve its ability to generate revenues of at least $2bn on a quarterly basis. Based on current consensus it is struggling to generate half that amount, with expectations for Q2 expected to be about $1.06bn.

The company has been experimenting with new products like Fleets, an Instagram stories like feature, and Twitter Spaces, however these are struggling to catch on. In the case of Fleets, Twitter appears to be have taken the decision to remove it. It turns out Fleets was rather fleeting. Unless twitter can harness the holy grail of monetising as well as growing its user base investors should be prepared for more disappointment. Profits are expected to come in at $0.07c a share

FX

The euro was broadly unmoved in the wake of today’s ECB policy decision. If the aim of ECB President Christine Lagarde was to talk a lot without actually saying anything new, then we can safely say “Mission Accomplished”

The rise in oil prices continues to help the Norwegian krone, while the pound appears to be stabilising after several days of declines, despite a broadly dovish speech from MPC policymaker Ben Broadbent, signalling that the Bank of England appeared content to ignore inflation and focus on the labour market. None of this was a surprise given his predilection for being dovish in previous speeches, however it was still a contrast to last week’s more hawkish comments from his colleagues David Ramsden and Michael Saunders.  

Commodities

Crude oil prices have continued to build momentum as we look to reverse the early week losses from Monday, and after US inventories showed a surprise increase yesterday. Gasoline demand appears to be showing signs of normalising with road traffic data picking up as the holiday season gets underway in earnest.   

Gold prices briefly hit a two-week low today, before rebounding in the wake of today’s weak weekly jobless claims number. The really off the lows came as US 10-year yields slipped back from their daily highs at 1.313%.