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European stocks pull off their lows as US yields retreat

trader on trading desk

Having started the day very much on the back foot, after yesterday’s steep falls in the US, European markets have clawed back the worst of the day’s losses, with the FTSE100 finishing higher for the second week in a row.

Europe

The rest of Europe has also seen a positive week, despite today’s pullback, buoyed by the ability of most companies to be able to pass on price rises and maintain their earnings guidance thresholds.

It is notable that despite the fragility being seen in US markets, that optimism about the outlook for company earnings seems more stable. This could be down to a perception that most European companies carry much cheaper valuations than their more richly valued US counterparts.

On the upside Unilever shares look set to finish the week higher in the aftermath of this week’s full year results, as they continue to recover their post Glaxo bid losses. The decision by management to rule out the prospect of an acquisition appears to have prompted investors to allow the benefit of the doubt to management, as they look to embark on a turnaround plan. There is also the fact that despite the sound and fury of recent events, the shares still look cheap on a relative basis.

British American Tobacco share price has also edged its way higher as we digest today’s full year results. The company reported full year revenue of £25.7bn, which came in slightly short of expectations, falling back below last year’s numbers by 0.4%. The shortfall on the revenue front probably wasn’t helped in H1, with reduced sales at airports and transport hubs.   

On the plus side, revenue from new categories rose by 42.4% to just over £2.1bn, keeping it on course to meet its target of £5bn target of New Category revenue by 2025, and 50m consumers of non-combustible products across their operations by 2030. The business is still loss making; however, the losses have continued to reduce, falling 9% to £100m. Vapour revenue was up 59%, with Vuse the leading vapour brand by value share globally.

Full year pre-tax profits came in at £9.16bn, with the company saying it was going to buy back £2bn of its shares.

Having slipped back yesterday on the back of a weaker oil price, BP and Shell are higher again, with BP setting another 2 year high, after this week’s decent profits numbers.    

Vodafone confirmed that it had rejected Iliad’s €11bn bid for its Italian business, saying that the bid was too low.

US

After yesterday’s sharp selloff, US markets have opened slightly higher, and rather surprisingly still remain higher on the week, despite this week’s sharp rise in US yields, although their resilience may well be being helped by the fact, we are slipping off their peaks, as we head into the weekend.

Given St. Louis Fed President James Bullard’s hawkish comments yesterday, all eyes are now on the prospect of whether the Federal Reserve will bow to speculation that they might move early, or leave their current timetable in place when it comes to hiking rates next month. The fact that a number of other Fed policymakers have pushed back on the prospect of an emergency rate hike at this time suggests that there is little appetite for such a move at this time, and the retreat in yields is reflecting that.

On the earnings front Expedia shares have hit new record highs, after shrugging off the setbacks posed by Omicron to post a $276m profit for Q4, while doubling revenue to $2.28bn. With Airbnb due to report next week, could Expedia outperformance be a leading indicator for a decent set of numbers.  

FX

The pound has ended the week very much on the front foot after UK Q4 GDP came in at 1% and December GDP only saw a modest contraction of -0.2%. Despite the disruption caused by Plan B restrictions in December there appeared to be only a modest effect on economic activity with positive activity in the construction and manufacturing sector.

With the UK economy posting a 7.5% rebound in 2021, the economic expansion was the biggest since 1945, and although Q4 showed a modest slowdown the numbers do offer some encouragement as we head into 2022. Today’s numbers also keep the prospect of another 25bps rate rise in March very much on the table, with attention turning to next week’s January CPI numbers.

After the big gains of last week, the euro has slipped back as various European Central Bank officials came out and dialled back the hawkish commentary from ECB President Lagarde’s post meeting press conference, although yesterday’s hot US CPI print also helped, pull it off yesterday’s three-month highs against the US dollar.

Commodities

Crude oil prices are higher again today after the IEA expressed concern that oil markets were likely to remain tight for the foreseeable future. While we’ve seen a retreat from the highs of this week, we could well see oil end its trend of seven successive weekly gains.

Gold prices are set to finish higher for the second week in a row, as the yellow metal continues to show signs of rediscovering its qualities as a traditional inflation hedge.

Volatility.

The Swedish Krona saw heightened levels of price action yesterday after the central bank laid out its position over monetary policy. Many in the market had been anticipating a rate hike, but with the Riksbank stressing that it still believes inflationary pressures will be transitory, a dovish statement saw the Krona weaken, driving daily vol to 15.2% up from 11.2% on the month.

The London-listed, Russian steelmaker Evraz struggled during Thursday’s trade, with the stock having lost close on one-third of its value since the start of the year. There’s concern that should Russia invade Ukraine, companies like this will be caught in the resulting sanctions, with yesterday’s losses driving one-day vol to 117% up from 66% on the month.

Looking at soft commodities, Soya is very much in focus, following downward revisions to crop forecasts out of Brazil, along with surging demand being reported in terms of US exports. There are some key fundamental drivers in play here and with prices up, around 30% since November, another shift in sentiment means there’s plenty of room on the downside. One day vol on Soyabean stood at 32.4% up from 25.4% on the month.

Finally, with cryptos, Ripple remains in focus with profit-taking off the back of those gains from the weekend, leaving the coin to fall close to 10% during Thursday’s trade. There are mounting expectations that Ripple will come out ahead against the SEC, but again that’s going to be big news that is well telegraphed, so the potential for further price action is very much in play. One day vol sat at 109% up from 80% for the month.


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