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Cautious open for Europe as rate concerns dominate

trader watching screens

European markets opened lower this morning, despite the big surge in US markets overnight, however concerns over higher inflation aren’t likely to diminish in the near term.

While yesterday’s Nasdaq rally was a positive development it came against a backdrop of a drop in US 10-year yields. If it can continue to move higher in the face of higher rates then the rally might be more convincing, however the higher inflation narrative isn’t likely to subside any time soon, which means any sustained Nasdaq rally could well be vulnerable to setbacks.

This morning’s sharp rise in Chinese PPI for February to 1.7% could well be another leading indicator for a rise in inflationary pressures in the coming weeks, along with this afternoon's US CPI numbers.

For today further weakness in oil prices is a welcome development at a time when concerns about rising inflation are gaining traction. With inventory data due out later today, there is a feeling that for all the concern about a sustained move through $70, oil prices may well be due a pullback towards $60.

Other commodity prices are also exhibiting signs of a short-term top as well, with copper dipping back below $4, and iron ore prices softer which in turn is acting as a drag on the mining stocks, with Rio Tinto and BHP leading the decliners  

On the reporting front Legal and General are the latest UK insurer to announce their latest full year numbers, which showed operating profits came in at £2.2bn, slightly down from 2019’s £2.3bn. Profit after tax this figure was slightly more disappointing, with a fall of 12% to £1.6bn, while return on equity declined to 17.3%. A rise in provisions related to higher Covid-19 claims appears to be behind some of the headwinds facing the insurance side of the business, and this rise in claims is expected to be sustained into 2021. The dividend was kept unchanged at 17.57p.

Another big winner of the last 12 months, has been Just Eat Takeaway, due to the closure of pubs and restaurants as delivery services have boomed. This morning the company reported an 18% rise in full year EBITDA to €256m, on the back of a 54% rise in revenues to €2.4bn. They remain very much the market leader in the delivery space with an increase in orders of 26% in 2020, with 2021 also off to a strong start, compared to 2020, though that shouldn’t be surprising given that the first three months of 2020 the UK wasn’t in a state of lockdown.

The number of active customers saw an increase of 23% to 60k, while the number of restaurants also rose by 42% to 244k, with an average order value of €22, a rise of 1.3%.

The overall loss for 2020 came in higher than in 2019, largely due to €102m of integration costs with respect to the Grubhub acquisition, which is expected to complete in the first half of this year.

Spirax-Sarco Engineering is amongst the best performers on the FTSE100 after reporting pre-tax profits that came in better than expected, although it was down 4.7% from the previous year. The company also reported a 4% decline in revenues, however a stronger than expected Q4 performance has increased optimism over the performance in the upcoming year, amidst a stronger consensus outlook.

It’s been a tough year for restaurants and bars, and Restaurant Group, owner of Wagamamas and the Frankie and Benny’s chain of restaurants has been no different having to rely on takeaway orders during the various lockdowns to keep some semblance of cash flow, along with various government support measures to keep going. This morning the company announced plans to raise another £175m, at 100p per share, on top of last year’s £54.6m, as it looks to bolster its finances as the UK economy heads towards an economic reopening in the early summer. This move to bolster the company’s finances appears to have been well received by the markets with the shares up over 10% in early trading. It also makes sense given the current optimism over an economic reopening giving the company an additional cash buffer putting the business in a sound position to take advantage of a rebound in suppressed demand.

In its full year results the company confirmed the exit of 250 sites, bringing the total number of sites down to 400, compared to 653, while securing £500m in new debt facilities over the end of this year. Total revenues for the year were down 57% to £459.8m, however the business was able to take advantage of the big increase in click and collect and delivery sales in 200 of its sites, which has helped soften the blows to its business model. Statutory losses before tax rose to £127.6m, a sum that was pushed higher after an exceptional charge of £40.1m.

Adidas this morning announced a decline in net profit in its latest Q4 trading update, as well as confirming its plans to sell its Reebok business. This process is likely to incur costs of €250m, however the company painted a positive outlook for 2021 despite the closure of its stores. The offset was a big jump in e-commerce sales which helped the business to return a positive quarter for sales, even though profits fell to €138m.

We also have the latest rate decision from the Bank of Canada against a backdrop of an economy that has been struggling to fill both full and part time roles. No changes to policy are expected with the hope that a resurgent US economy will act as a tailwind for Canada as well, along with the rebound in the oil price, which has been pushing the loonie higher.

US markets look set for a mixed open after the Nasdaq posted its best one-day gain in 4 months in the wake of a decline in US 10-year yields. If this is the shape of things to come with respect to the relationship between long term US yields and the Nasdaq then the next few days and weeks could well be a very bumpy ride. While the Nasdaq saw gains of over 3.5% yesterday it was very notable that the Dow only rose 0.1%. That divergence speaks volumes about how one particular sector is driving US markets, and as such speaks to how precarious current sentiment is.

If the upcoming US data even begins to show any signs of flickering inflation, thus exerting further upward pressure on yields then any further upside in the Nasdaq could well be challenging to say the least.

Today’s US CPI for February could well be an early case in point, if in fact we do get an upward jump in prices towards 1.7% as expected. It is almost certain that the recent sharp rise in commodity prices is likely to have significant pass-through effects in the coming months, putting upward pressure on prices in the shops, unless companies choose to absorb them. The recent cold snap in the US also had the effect of driving up energy prices in February which probably won’t help either, however the main concern is as to whether or not any of these price rises is permanent or transitory.

The fiscal stimulus payments should go some way to absorbing some of this upward pressure however even that of itself is likely to be inflationary. In January we saw US CPI slip back to 1.4% from 1.6% in December. This could well reverse in the coming months, and we could well head back towards the levels we were at a year ago when US CPI was at 2.4%.  

On the earnings front we’ll be getting the first set of numbers as a public company from Bumble, which sprang out of the IPO blocks last month. The online dating app made CEO Whitney Wolfe Herd a billionaire overnight as the online dating app raised $2.2bn, initially valuing the business at $7bn. With 42m active users and a unique selling point of letting women make the first move, the app appears to have struck a chord with investors with the shares rising sharply in the first few sessions, pushing the value up to over $70, and over $12bn. The company does have competition in the form of Match Group, which owns Tinder and, while Facebook is also looking capitalise on the growth in online dating apps. Today’s Q4 numbers will be Bumble’s first as a public company and given that in the first nine months of the year it returned a $117m loss on revenues of $417m its unlikely we’ll see much of an improvement in today’s numbers when additional IPO costs are added in. Full year revenues are expected to come in at $543m, a rise of 24% year on year.

Also reporting is AMC Entertainment fresh from raising another $304.8m by selling stock in January, after the shares surged during the Reddit inspired mania around GameStop. This action by management was a smart move, bringing the total raised since December to $917m, which helps buy the business more time, as we look towards an economic reopening towards the end of Q2 this year. Nonetheless the numbers are still expected to be awful with Q4 losses expected to top $4 a share. These losses come on top of the net loss of $561m in Q2, and $905.8m in Q3.

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