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European stocks struggle for direction, as airlines drag

European stocks struggle for direction

A negative lead from Asia saw markets in Europe open sharply lower earlier today, and although we’ve rebounded off the lows, it’s still difficult to determine an overall direction.

Europe

Investors shrugged off a minor downgrade to global growth for this year from the IMF, however no one really pays much attention to what these organisations have to say in the wider scheme of things.

The biggest laggards have been in basic resources, which helped underpin yesterday’s FTSE100 gains. The problem facing investors right now is the bi-polar nature of markets one day to the next. Since July we’ve seen moves to the upside, as well as the downside, but within a clearly definable range.

While investors want to believe a narrative that can see equity markets move higher, any optimism is being tempered by the prospect that rising prices, as well as supply chain disruptions, may well negatively impact profit margins, as well as prompting a consumer slowdown.

The main change since July has been a sell-off in bond markets, which has seen yields move quite a bit higher, reflecting much more elevated inflation expectations over the next six to 12 months, and it will be company guidance over the next few months that may well dictate where we head next.

Airlines have been another drag today, with IAG and Ryanair in negative territory after easyJet announced a full year loss of just over £1.1bn.

The numbers weren’t all bad, however today’s update also serves to illustrate the challenges facing the industry as we head into another fiscal year which is still likely to be pandemic affected. We’ve seen a decent rally off the lows this year, however the rebound has been somewhat constrained with the shares pretty much where they were at the start of this year.

Today’s Q4 update showed that the airline reached 58% of 2019 capacity, flying 17.3m seats, which was slightly above what it expected in early September, and well above the 17% in Q3. Nonetheless it still fell slightly short of the 60% it had hoped for in its initial Q3 numbers. In a sign that it is more optimistic about its next financial year it raised its capacity guidance for Q1 from 60%, to 70% of 2019 levels.

The recent rights issue has helped reduce its debt to £900m from £2bn giving the airline a solid platform from which to build its resilience for its next fiscal year. With rising fuel prices, a significant headwind easyJet has said it is 55% hedged for the year at $500 a metric tonne, with current spot prices currently 50% higher.

Today’s Q3 update from Entain appears to encapsulate why US betting giant DraftKings wants to pay $22bn for the business. Today’s trading update showed net gaming revenue up 4%, with online NGR up by 10%, and the 23rd consecutive quarter of double-digit growth.

BetMGM also saw a strong quarter, cementing its position as one of the market leaders in its segment, with the company restating its full year guidance of EBITDA between £850m to £900m. 

It certainly raises the bar further for DraftKings given the performance of BetMGM and given this performance it certainly makes the task of pushing the bid forward much more complicated. Entain certainly has plenty of assets, with a strong brand in the UK as well as its other 27 markets. With this in mind MGM is highly unlikely to want to give up its designs on Entain, but if it does it may look to extract a higher price from DraftKings to be even persuaded to do a deal, and that’s even before competition authorities stick their noses in, which would seem likely if any deal starts to materialise.

GlaxoSmithKline shares are higher on reports that there is significant interest in the company’s consumer business, which in recent months, as part of the company’s restructuring program, is being prepared to be split away from the rest of the wider pharmaceutical’s operation. CEO Emma Walmsley has been under increasing pressure from activist shareholders over her suitability to turn the business around. The prospect of a sale of the consumer business, with numbers of around £40bn being bandied about has caused the shares to tick higher, jumping briefly to a one month high, on reports of private equity interest. With several interested parties it might even be worth Glaxo spinning it off as an IPO. 

After hitting their lowest levels in 18 months earlier today, Ocado shares have strongly rallied this afternoon, after its US supermarket partner Kroger announced it was expanding its delivery offering, as it looks to expand in the Northeast of the US, as well as Florida and California. Kroger uses Ocado fulfilment centres for its delivery operations.

US

US markets initially pulled back some of yesterday’s losses, opening higher, however they appear to be struggling for direction, with most attention on the start of earnings season tomorrow, with the release of JPMorgan Chase’s Q3 numbers, as well as the latest US CPI numbers which are also out tomorrow.

The latest Fed minutes, also due tomorrow, will also be monitored for indications of whether there is a strong urge amongst FOMC members to start tapering next month.

The best performers on the S&P500 are MGM Resorts after being the recipient of an upgrade from Credit Suisse, with Las Vegas Sands and Wynn getting a lift as well.

Tesla is also higher after announcing a 26.5% rise in the sales of cars made at its China Gigafactory.    

FX

The resilience in oil prices appears to be helping the Norwegian Krone and Canadian dollar, while the Australian dollar is continuing its recent gains, on optimism over the Australian economy as it continues its unlocking process. 

The pound is treading water somewhat despite another decent set of economic numbers, as unemployment came down to 4.5%, with employment back at levels pre-pandemic in February 2020. Yet for all of this we still have over 1.1m vacancies begging the question where have all these extra roles come from? 

Commodities

There still appears to be little let up in the upward path for crude oil prices, with US prices looking to close at a seven year high, while Brent crude prices are flirting around $84 a barrel.

With no sign that OPEC+ intends to increase production further, there is a risk of a move towards $90 a barrel, with all the attendant risks that brings to the prospect of demand destruction, as businesses find it harder to stay open as energy prices increase beyond their ability to make a profit.


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