European markets have had a much better tone today after a rather mixed session yesterday. What hasn’t changed is the underlying bid tone to travel and leisure stocks, which are continuing to build on their recent gains with another strong session.
Among the best performers on the FTSE 100 is British Airways owner International Consolidated Airlines, ahead of the release of its full year results this Friday, as demand for flights starts to pick up in anticipation of a much better second half for 2021.
While all of these gains are very welcome, with easyJet and Ryanair shares also doing well, the fact remains that while capacity is likely to increase over the course of the rest of the year, what airlines like IAG really want to see is a resumption of business travel, and it’s hard to see how that can return to normal any time soon.
Also seeing a continuation of the gains from yesterday British Land and Land Securities are rising again, having seen good gains yesterday on optimism over non-essential retail reopening from 12 April. Basic resources are also performing well, helped by a Brent crude price back at levels last seen at the beginning of last year at $67 a barrel. BP and Royal Dutch Shell are feeling the benefits of that.
Despite a decent set of full-year numbers, and a resumption of the dividend, Lloyds Banking Group has seen its shares slip back from 11-month highs. Today’s full-year numbers showed that statutory profits for Q4 came in at £792m, well above expectations of £471m, taking statutory full year profits after tax to £1.39bn, a decline of 54% from last year. Net interest margin for Q4 did improve slightly from Q3’s 2.4% rising to 2.46%, but was still well below last year’s levels of 2.88%. It would appear that the recent steepening in UK yields has offset some of the weakness seen in Q3, however over the year NIM has still come down to an annualised 2.52%.
Consumer goods company Reckitt Benckiser also posted a decent set of full year numbers, as well as announcing that it is selling its Scholl brand to Yellow Wood partners, while looking to acquire Biofreeze, a pain relief gel brand, which uses a combination of various mint products to relieve muscle pain. The company also said it was doing a strategic review of its Chinese baby formula business, which it acquired as a result of its Mead Johnson takeover. Total sales for the year saw an increase of 8.9% to just under £14bn, with the bulk of that gain coming from a 15.6% rise in its hygiene brands, while health also contributed with a 9.6% rise in sales, as Covid-19 acted as a catalyst for a strong year. Sales of products like Lysol performed well along with Dettol as consumers became more hygiene conscious, however despite this, profits were down from 2019 levels, largely as a result of higher costs, and a goodwill impairment of £985m. The company said it plans to pay a full year dividend of 174.6p, unchanged from a year ago, however that hasn’t been enough to stop it from sliding lower on the day.
Also having another disappointing day are the usual suspects of Just Eat Takeaway and Ocado, down for the third day in a row, as reopening optimism continues to take its toll. Vodafone shares are at the bottom of the FTSE 100 after confirming that its upcoming Vantage Towers IPO would take place before the end of next month on the Frankfurt Stock Exchange.
US
US markets opened lower after a sharp rise in US 10-year yields through 1.4% saw the likes of the Nasdaq and S&P 500 start to roll over, as the prospect of higher rates erodes the attraction of some of the more highly valued areas of the US stock market. While we’ve seen a bit of a rebound in the S&P500 and the Dow the Nasdaq has remained under pressure in early trade.
Yesterday Fed chair Jay Powell said that he was quite relaxed about the prospect of higher rates and higher levels of inflation. It looks like markets are about to test this premise, as well as the resolve of the US central bank in not reacting to the prospect of much higher long-term borrowing costs. We also heard from permanent Fed governor Lael Brainard where the underlying message was quite similar to the one given by Powell, while later in the day we also get to hear from Fed vice chair Richard Clarida.
The rise in US long-term yields will be most keenly felt in the US housing market where mortgages are likely to become much more expensive, with the US 30-year yield rising from 1.65% at the beginning of the year to a thirteen-month high of 2.29% earlier today. US 2-year yields are still well-anchored down near 0.13%.
US new home sales in January rose by a better than expected 4.3%, above December’s 1.6%, however the recent rise in long term rates could well impact demand in February, where we saw a 11.4% decline in mortgage applications.
Johnson & Johnson shares are gaining ground after US regulators said its single shot Covid-19 vaccine is safe and effective in a study of 43,000 participants with a 72% efficacy rate. This paves the way for a possible authorisation by the FDA as soon as this Friday.
Uber shares have come under pressure on reports that Chinese ride sharing company Didi plans to open up an operation in Europe, targeting markets in the UK, Germany and France.
Peloton Interactive is also feeling the effects of the reopening or reflation trade, with the reopening of gyms potentially diluting the popularity of this particular activity.
FX
The pound continued its recent move to multi year highs against the US dollar as short sterling traders started to hedge their positions against a possible interest rate rise by 2024. The prospect of a faster than expected removal of lockdown restrictions, may well also had a part to play in today's move up to 1.4240, though this possibility was played down by UK government officials.
Optimism over an economic re-opening is also being reflected in UK gilt yields which are near their highest levels in almost a year at 0.76%, and up from 0.173% at the beginning of this year.
The Canadian dollar is continuing to gain against the US dollar hitting a three year high on the back of the ongoing rise in the oil price.
Commodities
Oil prices are rebounding from their lows from yesterday, after a surprise 1m build in US inventories prompted a little bit of a sell off. A lot of the gains over the past few days have been predicated on the belief that an economic reopening will cause a rise in demand, while the recent production shutdowns in the US have raised the prospect of a short-term supply crunch. Today’s inventory data was expected to show another big draw with expectations of a 6.5m decline, however this also showed a small build.
Bitcoin is endeavouring to maintain a foothold back above the $50,000 level after yesterday’s declines saw it plunge to a low of $45,000.
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