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Market update

Positive start to the week, but FTSE100 lags on weaker oil price

It’s been a broadly positive start for European markets today, although the FTSE100 has lagged due to weakness in oil and gas prices, which is dragging down the likes of BP and Shell.  

Europe

Ocado shares are higher after an upgrade from Exane, while Croda is also rebounding after losses on Friday in the wake of its profits warning.

AO World shares are higher after Mike Ashley’s Fraser Group acquired a 19% stake in the business at 68p per share in a welcome boost for the online retailer, with Odey Asset Management reducing its stake by a similar amount.

In April AO World followed up its two guidance upgrades of earlier this year with a positive end-of-year trading update, which briefly sent the shares to 11-month highs. UK revenues are expected to come in at £1.13bn, while management upgraded profit guidance to the top end of its recent range of EBITDA of between £37.5m to £45m. This partnership with Frasers Group is welcome news for the company indicating confidence in the turnaround plan, and the outlook for the rest of the year.   

UBS shares are higher after the final details were completed on its takeover of Credit Suisse. Now the hard work begins in how UBS intends to integrate a bank that has 48k employees and a profitable retail bank.

UBS CEO Sergio Ermotti is already a seasoned professional when it comes to restructuring UBS, he’s done it on multiple occasions over the past 13 years and this is likely to be his most challenging task to date given the politics that are involved. The Swiss government guarantees are well documented and may well not be needed, however job losses are likely, and some customers may find that they don’t meet UBS’s likely stricter risk controls.

The main problem aside from marking down the value and offloading any assets that don’t meet the bank's risk profile is what to do with the profitable CS retail operation. With the takeover having been completed there is little in the way of risk diversification when it comes to the Swiss consumer. The regulator may ask UBS to spin off the CS branch network. There is also the problem of “too big to fail” which means UBS may find itself subject to more onerous capital requirements.  With UBS set to report on 31st August the hard work begins now for Ermotti and UBS.

US

US markets have started the week on the front foot with the S&P500 opening above 4,300 for the first time this year, as markets gear up for tomorrow’s US CPI report for May, and an expectation that the Fed will keep rates on hold when they meet later this week.

Nasdaq shares are lower after the company announced it was paying $10.5bn for banking software business Adenza from Thoma Bravo, who have obtained a 14.9% stake in Nasdaq, along with a seat on the board.

Cruise ship operator Carnival shares are on the up ahead of next week’s Q2 numbers after JPMorgan and Bank of America upgraded their price targets saying that the current trading environment offered zero evidence of slowing momentum. Today’s double upgrade has helped give a lift to Royal Caribbean and Norwegian Cruise Lines.

FX

Even as US yields remain near their recent highs, the US dollar continues to push higher with the main gains coming against the Swiss franc, as well as sterling and the Norwegian Krone.

The yen is also slipping back with both the Federal Reserve and the Bank of Japan set to make policy decisions later this week, the line of least resistance appears to be for a higher US dollar, unless the Japanese central bank catches the markets off guard by tweaking its yield curve control policy at the end of this week.

The pound appears to be undergoing an element of profit taking after hitting 10-month highs against the euro at the end of last week, and failing to push through the 1.2600 area against the US dollar.  

Commodities

If the intention of Saudi Arabia was to help push oil prices higher with its decision to cut production to 9m barrels a day from next month, then recent price action would suggest that they have failed in that aim. With Brent crude prices falling back close to their lowest levels this month we can’t even blame the strength of the US dollar for today’s weakness. Markets appear to be more concerned about economic conditions in China, the sputtering rebound there and downgrades to demand by various investment banks.

This weakness is also manifested itself in lower copper prices which failed to move above their 200-day SMA at the end of last week, and where there is some key technical resistance.


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