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European markets shrug off higher rate concerns

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European markets have got off to a mixed start to the week with DAX and FTSE 100 pushing higher, while a sharp rise in Italian borrowing costs appears to be weighing on the FTSEMib which is down heavily for the third day in a row.


Among the best performers today British Airways owner IAG is higher on data that appears to show it is adding back capacity at the fastest rate amongst the major airlines. The decision by the Australian government to reopen its borders to international travellers from 21 February is also likely to offer the airline a boost.

Rio Tinto is also higher after JPMorgan lifted its price target for the mine, while higher yields are offering a boost to the UK banking sector with Lloyds, HSBC and Barclay all higher.

Vodafone shares have also edged higher on reports that it might be considering selling off its UK business, as part of a business reorganisation. While on the face of it this might make sense it’s hard to see how this would address the weaknesses in other geographies like Italy and Spain, where margins are equally as squeezed.        

There’s been little or any reaction to weekend speculation that Reckitt Benckiser might be looking to offload various underperforming parts of its business isn’t anything new, it’s been a market staple for the last few years. Pre-pandemic management was facing similar criticism for underperformance in various parts of its portfolio.

Now with costs rising and margins getting squeezed Reckitt has joined the likes of Unilever in facing shareholder pressure to up its game, with sector peer Unilever also facing similar shareholder disquiet, as another two major shareholders broke ranks at the weekend to urge a major rethink on splitting the business.  

According to weekend speculation Reckitt management are reported to be considering a sale of the infant nutrition business that 5 years ago it paid Mead Johnson $17bn for.

The rationale at the time was that it enabled access to the Chinese market, however the purchase hasn’t been without its problems, with management taking the decision to sell the Chinese part of the business last year for $2.2bn.

The sale of that appears to have raised the question as to whether the company needs to be in the business at all given how little market share it now has relative to its closest peers. Whatever company management decides, one thing is certain, this is yet another M&A deal that has failed to deliver for shareholders and destroyed a lot of value in the process.  


The feelgood effect of the second positive week in a row has seen US markets open modestly higher, despite yields also going in the same direction, although the strength of Friday’s payrolls report has generated an element of confidence that the US economy can withstand some modest rate rises.

Peloton shares have surged on reports the embattled company is attracting the interest of Amazon and Nike, only days after speculation had been circulating that Apple might also be interested. The company has had a nightmare last 12 months, its share price has collapsed over 75% on a combination of factors including falling subscriptions, supply chain and production problems, which has seen the company suspend production of its bikes and treadmills due to waning consumer demand. It's not immediately obvious why anyone would want to pay in excess of $10bn for a company that sells expensive exercise equipment, and subscription packages. We could get some additional colour on this when Peloton reports its Q2 numbers tomorrow.

Tyson Foods shares hit a record high after reporting better than expected Q1 earnings numbers, boosted by higher meat prices, which offset lower sales volumes.  


It’s been a mixed bag for the US dollar today, losing ground against the Australian dollar, which appears to have benefitted from the announcement by the Australian government to reopen the borders to double jabbed visitors from the 21st February.

The euro is the worst performer as it gives back some of its gains of the last few days, as well as shrugging off some hawkish talk from Netherlands ECB governing council member Klaas Knot who suggested that a rate hike could come as soon as Q4. It would appear that currency markets are dismissing the risk of this for the moment, however the rise in European yields suggests a different story.  


Brent crude oil prices have made another new 7 year high after Saudi Arabia raised prices for their Asia customers, as it looks towards an eighth successive weekly advance. Chatter over a possible Russian invasion of Ukraine continues to underpin prices, while on the other side of the ledger, talks of progress in the latest US/Iran talks has helped cap advances.

Having spent so long being hammered by a negative correlation to rising US yields, gold prices now appear to be rediscovering its properties as an inflation hedge, although it still has some way to go before it breaks out of its range of the last few months. For now, a slightly weaker US dollar is helping to support, along with rising concerns about more persistent inflation.

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