European markets have continued their buoyant tone from yesterday, with the German DAX posting yet another record high, along with the Stoxx600, while the FTSE100 has also finished the week posting a fresh 20-month peak.
Europe
Today’s news out of the US that Pfizer has developed a Covid-19 pill, which is 89% effective in preventing hospitalisation, may well be weighing on the AstraZeneca share price a touch, but it has pretty much turbocharged the airlines and hospitality sector.
After German national carrier Lufthansa posted a surprise profit earlier this week, hopes were high that today’s latest numbers from British Airways owner IAG would follow a similar trend. Capacity in Q3 was 43.4% of the levels in 2019, which was slightly below the 45% planned for at the end of Q2, with current plans for Q4 set to rise to 60%.
Total revenues year to date rose to €4.9bn, with Q3 contributing €2.71bn of that number. This has translated into the airline posting an operating loss of €452m, which was better than forecasts of €567m, pushing losses year to date, and after tax up to just over €2.6bn.
In terms of the trading outlook while capacity is expected to rise in Q4 as US routes reopen, losses for the year are still expected to be around €3bn, with the company incurring operating costs to the tune of €260m a week during Q3.
After an initial bout of weakness in early trading the IAG share price turned around, and with US travel set to restart and the positivity around the new Pfizer Covid pill, the shares have hit a 3-week high, with the rest of the travel and leisure sector getting a lift as well.
This optimism has also translated into a strong move higher for Rolls-Royce share price, after several days of lacklustre trading activity, as the prospect of increased flying hours boosts hopes it will be able to meet its EFH target.
We’re also seeing strong gains in easyJet’s share price, along with Ryanair, Lufthansa, TUI, while Holiday Inn owner IHG shares are also higher.
US
US markets opened at new record highs after the payrolls report for October showed 531k new jobs added to the US labour market, while we also saw a decent upgrade to September from 194k to 312k in September, with the S&P500 now trading north of 4,700.
The unemployment rate fell to 4.6%, from 4.8% while the participation rate remained unchanged at 61.6%. By any measure these numbers are positive and with wages also rising, jobs growth as we head into year end should accelerate. This already appears to be being borne out in the continuing claims numbers which are only 400k above where they were pre-pandemic.
Peloton’s woes have continued after yesterday’s Q1 numbers saw the company’s problems get even worse. In Q4 the company cut its revenue forecasts for Q1 to $800m to $810m, while cutting the price of the original bike by $400, which means that the company would probably make a loss of $285m in Q1. These numbers more or less came in as expected, although losses were higher at $376m. The company also went on to slash its revenue guidance for the full year from $5.4bn, to a range of $4.4bn to $4.8bn. The reopening of gyms and the economy in general has seen subscriptions and sales level off, and with increased marketing spend, and lower prices, costs have risen sharply, hammering margins.
Uber finally appears to be turning a corner, after returning an operating profit in Q3, due to a decent performance from both its food delivery and ride sharing businesses. Unfortunately, while the actual businesses managed to eke out a positive return, when everything else is included, the company still posted a $2.4bn loss due to its investment in Chinese ride sharing app Didi Chuxing. Booking revenue rose to $4.8bn, a rise of 72% from a year ago, while gross bookings across the entire business rose to $23.1bn. For Q4 Uber expects this to rise to between $25bn and $26bn, with food delivery starting to outweigh ride sharing on a segment basis, although ride-sharing continues to provide the better margins.
Pfizer shares have surged after the pharma giant announced it was seeking approval for a Covid-19 pill that in trials was able to reduce hospitalisations and deaths in high risk covid-19 patients by 89%. This news has sent the shares of BioNTech and Moderna sharply lower, while Merck who also announced a similar pill a couple of weeks ago also saw its shares slide.
This news has also seen a surge in US airline shares with American Airlines, Delta and United all higher, along with the cruise lines of Carnival, Royal Caribbean and Norwegian.
FX
The pound has continued to struggle today, as markets continue to absorb the fall out of yesterday’s decision by the Bank of England to push back on an interest rate rise. To compound the confusion Bank of England chief economist Huw Pill insisted that people should be in no doubt that the bank was ready to act on rates.
Sadly, no-one appears to be listening, with UK 2-year yields falling another 8 basis points, on top of the almost 20 bps fall yesterday, and therein lies the central banks problem now.
The signal to noise ratio for the bank to convince the markets it is ready to act will inevitably have to increase to make sure that any policy message gets across, and after yesterday’s fiasco that has become that much harder.
To use one of my favourite film metaphors, in reference to monetary policy, the central bank will need to raise the volume to ensure it gets its message across. Instead of “one ping only” the bank's forward guidance is likely to need multiple pings to verify the range to target.
The US dollar had had another positive week, hitting a new 18 month high against a basket of currencies in the wake of today’s positive payrolls report, while the Japanese yen has been the best performer largely as a result of the sharp fall in US yields, which generally tends to favour the lower or negative yielders more.
Commodities
Crude oil prices have slipped back for the second week in succession, which is welcome news for hard pressed consumers, concerned about sharp rises in energy costs, and fuel pump prices. OPEC+ confirmed their intentions to increase production by 400k barrels a day, pushing back on comments from US President Biden to up their output levels more. If the US wants to increase supply it is perfectly capable of doing that itself, by increasing shale supply, something that has already happened with rig counts already at levels last seen in April 2020. We will probably see another increase today in rigs today.
The slide being seen in yields today has continued to support gold prices, even as US jobs in October beat expectations. Most of the improvement seen in today’s jobs numbers had already been priced in by the markets, with portfolio adjustments continuing to be made because of the events of the last 24 hours, which saw the central bank push back on rate hike expectations.
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