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Oil slide helps pull European markets off their lows

oil platform

European markets initially fell back sharply today, taking their cues from a big sell-off in Asia that appeared to be prompted by concerns that China might open itself up to US sanctions if it acquiesced to reported Russian requests for military aid in its war with Ukraine. Economic concerns over increasing Covid lockdowns have also served to act as a drag.

Europe

As the day progressed, we’ve seen a modest stabilisation, with markets pulling off their lows as lower oil prices, and a slightly softer than expected core US PPI number pulled European equities up to finish the day with only modest losses. 

The decline in oil prices and the dropping of the remaining travel restrictions, including testing and mask mandates, has seen airlines pull off their intraday lows with easyJet seeing decent gains while IAG has also found some support, although Wizz Air has continued to underperform.

One of today’s better performers has been Informa who reported a decent set of full year numbers, as well as upgrading its forecasts for 2022. For 2021 revenues rose 8.3% to £1.8bn, while adjusted pre-tax profit came in at £320.6m. For 2022 the company said it expects to see revenue of £2.15bn to £2.25bn and adjusted operating profit of £470-490m.

Imperial Brands shares have shrugged off the reduction in full-year revenue guidance, as it looks to sell its Russian assets. A week ago, the company announced it was suspending all its operations in the country. The market in Russia accounts for about 2% of its overall revenues and about 0.5% of adjusted operating profit. The company now expects full year currency net revenue growth of between 0-1%.

When Ferguson reported in Q1 the business saw a 26.6% rise in revenues to $6.8bn, while raising expectations for the full year. Today’s Q2 and H1 numbers appear to have lived up to those forecasts with net revenues rising 31.8% to $6.5bn, while operating margins have improved to 8.5%, although investors seem less than impressed, with the shares falling back sharply, as the company confirmed it would shift its primary listing to the US on 12 May.

On first-half basis, net revenues rose 29.1% to $13.3bn, with the gains being driven primarily by the US business, with Canada lagging. Management was positive on the outlook but indicated that the positive trends on margins seen in H1 would fall away in H2, thus keeping full year expectations unchanged. 

Also lower we’ve seen Asia-focused companies come under pressure with Standard Chartered and Prudential sliding back. Concerns over a China slowdown are also weighing on basic resource stocks with Rio Tinto, Glencore, and Antofagasta lower.

US

US markets opened higher after the latest February PPI report came in as expected, at 10%, however a decline in core PPI excluding trade from 6.8% to 6.6% has raised the prospect that we might be getting close to seeing peak inflation when it comes to supply chain price pressure.

Airlines have been a notable outperformer in the US on the back of the decline in oil prices, and thus lower fuel prices, while the removal of mask mandates and other restrictions in England has given a boost to transatlantic routes to London, with American Airlines, Delta and United all getting a decent lift.

The owner of Odeon cinemas here in the UK, owner AMC Entertainment is in the news again, this time for paying $27.9m for a 22% stake in gold miner Hycroft Mining. Having just about survived a near death experience last year because of the pandemic, shareholders could be forgiven for asking what on earth management and CEO Adam Aron is playing at?

At its most recent earnings announcement the cinema chain reported Q4 revenues of $1.17bn, its best performance in two years, and above expectations. Nonetheless the company still reported a loss of between $195m and $115m, and while the loss was better than last years $946m Q4 loss, the company still has net debt of over $9bn. It therefore beggars’ belief that the company is paying $27.9m for a stake in a struggling gold miner, rather than investing that money in improving the business.  

We’ve seen another choppy day for US listed China tech shares with Alibaba and Pinduoduo remaining under pressure, although Tencent Music shares do appear to be finding some support. 

FX

The pound has started to gain a bit of traction after today’s fall in UK unemployment to 3.9%, and its lowest level since before the pandemic. Wages growth has continued to lag behind inflation; coming in at 3.8%, however, it does appear to be showing signs of picking up, having been on a downward track since the middle of last summer. Vacancies rose to a new record of 1.3m, a rise of 105k on the previous quarter. 

The euro has managed to shrug off an absolute shocker of a ZEW survey for March, with both key measures seeing a precipitous drop. The current situation survey was expected to be poor, falling to -21.4 from -8.1, however the expectations index fell off a cliff, as fears of either recession or stagflation saw a fall from 54.3 in February to -39.3 and the lowest level since March 2020.

Commodities

The continued flow of Russian oil, as well as concerns over a slowdown in economic activity has seen crude oil prices fall to their lowest levels in two weeks. A statement from Russia that indicated it was in favour of the resumption in Iranian supply also weighed on prices. Today’s move below $100 a barrel has come just over a week after Brent crude prices hit their highest levels since 2008, just shy of $140 a barrel, a more than $40 swing in the space of a week, in a move that could well take some of the heat out of recent inflation expectations.

A week after retesting its previous record highs above $2,070 an ounce gold prices have fallen to their lowest levels in 10 days, as the yellow metal loses its lustre ahead of the start of today’s FOMC meeting. The recent sharp rise in US yields has dimmed the appeal of gold ahead of what could well be a hawkish statement and press conference tomorrow. 

Volatility

Starting with single stocks, there’s once again a slew of activity being seen on those Chinese equities with dual US listings, amidst concerns these may not be sustainable, with pressure here being further compounded by the spike in domestic COVID cases. Pinduoduo topped the board with daily vol of 592% being recorded against a one month print of 228%, whilst Baidu, Sands China and JD.com also all saw daily vol exceed 400%, well over double the corresponding monthly readings.

Perhaps unsurprisingly that drove price action on Chinese indices to the fore as well, with the A50 posting daily vol of 68% up from 41% on the month, whilst the Hong Kong 50 advanced to 61% over 36%.

In terms of commodities, Lumber is back on the radar after prices hit 10-month highs last week. Although there was a modest reversal, this proved to be short lived, the result being daily vol jumped above 300% against a monthly print of 201%. Another commodity to keep an eye on may be cocoa where prices softened slightly yesterday off the back of improved crop forecasts, yet the underlying remains around multi-month highs.

As for fiat currencies, Sterling Aussie Dollar is something of a standout with daily vol of 11.03% being recorded against a monthly print of 8.91%. Several factors have been in play here, including risk sentiment and a correctly called hawkish assessment of the RBA meeting minutes which were published a few hours ago. Finally, with cryptos, again its IOTA that shows itself to be the most active here following what looks like a technical rebound off previous support levels. Daily vol sat at 592% against 419% on the month.


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