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Easing inflation concerns drive end-of-week rebound, FTSE 100 back above 7,000

FTSE 100 back above 7,000

European stocks have continued to recoup some of this week’s lost ground, with the FTSE 100 recovering nicely back above the 7,000 level, with the DAX and CAC 40 also performing well.

The underperformance in the FTSE 100 is primarily being driven by mining stocks which are being clobbered on the back of a sharp slide in iron ore and copper prices, after Chinese authorities expressed concern over their recent steep rise, amidst a surge in production at Chinese steel mills.

The CRB commodities index also underwent its biggest one day fall since 18 March yesterday, on the back of a broad-based decline across the commodity space. While this is not good news for miners, it’s much better news for the rest of us given that a lot of the concerns about inflation have been driven by recent surges in commodity prices.

Today’s biggest fallers are Rio Tinto, BHP and Antofagasta, however the easing back of inflation concerns is giving the rest of the market a timely end of week boost, after US retail sales for April unexpectedly came in short of expectations.   

Sage Group is among the best performers on the FTSE 100 today despite reporting H1 results that were on the face of it weren’t particularly eye-catching. Operating profits declined 30% to £203m while revenues fell 4% to £937m. On the plus side recurring revenues saw an increase of 4%, rising to £811m, and it is here that investors seem to be taking encouragement.   

Ahead of next week's easing of restrictions it’s been a bit of a mixed bag, with Premier Inn owner Whitbread doing well, along with the likes of Cineworld, as cinemas get set to reopen, while Wagamama’s owner Restaurant Group is also steady just below one-year highs. Holiday Inn owner Intercontinental Hotels is also seeing decent gains.

Airlines have been more mixed with easyJet slightly lower on uncertainty over who can travel when and where, with Ryanair also treading water.

Alphawave has had a much better day after a disappointing first day debut which saw its shares slide well below its IPO price of 410p. It looks set to recover another big slice of its first day losses with a sizable 9% rebound.  

US markets

US markets have continued their recovery from their early week slump opening higher, despite April retail sales missing by quite some way. A reading of 0% was a little disappointing given an expectation of a 1% rise, and though March was revised up to 10.7%, the stagnation seen in the April numbers suggests that concerns about pent up demand driving a rise in inflationary pressure doesn’t appear to be a concern for now.   

Airbnb shares have been on a downward track since they posted record highs back in March, as some of the early enthusiasm for the IPO wears off. It’s not hard to see why when you look at its lofty valuation, and even though we’re down by over 30% from those peaks it’s still worth over $80bn, a figure that puts well above the likes of Marriott and IHG. Yesterday’s Q1 numbers saw sales beat expectations with gross bookings surging to $10.3bn, while revenues came in at $887m. Losses widened to $1.95 a share, largely due to a debt repayment, while Q2 revenues are expected to be at a similar level to the same quarter as 2019, which is a little disappointing. Over 50% of Airbnb’s revenue came from the US which suggests that there is potential for a lot of upside in a global sense, however given virus flare ups globally the rest of the world is likely to take a bit longer to pick up the slack.

Disney Q2 numbers were eagerly anticipated given that US theme parks were now starting to reopen, and film and TV production were also ramping back up. In March the shares hit a record high, and while they have since drifted back the outperformance has been remarkable given how much of its core business has been shut down these past 12 months. Losses in the parks are still high, coming in at $406m, while revenues came in at $3.17bn. Total revenues over the quarter came in at $15.61bn, which was below expectations, while the growth of Disney+ subscribers appear to be starting to plateau, as subscribers rose to 103.6m, well short of the 110m target.

This shouldn’ t be a surprise given the similar slowdown seen by Netflix as the weather gets warmer, however there is also an element that a lack of new programming could also be seeing a slowdown in numbers. What is more worrying is that streaming revenue declined per head as the company rolled out its India service where prices are lower. Disney were more optimistic about the upcoming quarter but still pointed to headwinds on the parks, with an estimate of another $1.2bn impact on revenues due to lower capacity constraints. Profits were still better than expected, coming in at $901m, or $0.79c a share.

Coinbase shares have opened higher, after revenues and profits surged in its first quarter as a publicly listed company. None of last night’s numbers were markedly different from what the company had preannounced back in April. Q1 net income came in at $771.5m, while revenues rose to $1.8bn, which was still more than the company turned over in the whole of 2020, but was still slightly lower than what had been expected. The number of verified users was confirmed at over 56m. In terms of the outlook, management were somewhat cautious predicting flat transaction volume for Q2, though they did revise up their guidance on the number of monthly transacting users to 7m from 5.5m. The planned admission of dogecoin in the coming weeks could also help drive volume.   

FX update

US inflation concerns have subsided a touch this afternoon after US retail sales surprisingly stagnated in April, and industrial production missed expectations. This would appear to suggest that the early week concerns about surging prices might be slightly overstated. The weak retail sales numbers would appear to suggest that some of the concern about pent up demand fuelling a spending boom is a little overdone. The weak numbers prompted a further softening in US 10-year yields, with the US dollar also sinking back.

The pound has recovered some of its mojo this week, ahead of the next stage of the UK’s economic reopening on Monday next week, where we’ll also get to see whether UK inflation has seen a similar uplift to headline CPI as we’ve seen in the US and China this week. Headline inflation is expected to jump sharply to 1.5% from 0.7%, however most of the rise is likely to be down to base effects, supply chain disruption costs, and higher transport costs, like airfares and energy prices.  

Commodities latest

Commodity prices appear to be fading a touch as we head into the end of the week. We’ve already seen signs of a top in lumber prices, while iron ore prices have also come under pressure today.

Crude oil prices appear to be bouncing back from yesterday’s losses, helped in some part by today’s US dollar weakness, though the upside appears constrained by concern over the spread of the Indian variant across the rest of Asia. Singapore authorities appear to be heading back into a lockdown situation for one month as cases there rise.

Gold prices are once again moving in the opposite direction to US 10-year yields, with the potential to retest the 200-day MA which thus far this week has kept a lid on prices.

Bitcoin prices appear to have shrugged off Tesla CEO Elon Musk’s abrupt handbrake turn on, recovering back above $50k, while Ethereum appears well on course to reverse all of yesterday’s losses.

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