It’s been another choppy week for European equity markets with weakness in US equity markets bleeding into a negative end to the week, as speculation about the pace of US rate rises keeps investors on edge. Talk from various Fed policymakers that up to five rate rises might be needed before the end of the year is creating extra volatility and some anxiety, particularly where the Nasdaq is concerned.
The FTSE 100 has continued to outperform and looks set to close higher for the fourth week in a row, despite today’s underwhelming close, unlike the FTSE 250 which has underperformed year to date, like the rest of Europe’s markets.
The DAX has also had a poor day, sliding back after the latest estimates from the Germany stats office, showed the German economy probably shrank by 0.5% to 1% in Q4, as a combination of supply chain disruptions and Omicron restrictions curtailed economic activity, a trend that looks set to continue into Q1.
The energy sector is helping to keep the FTSE 100 afloat, helped by another two-month high for Brent crude prices, which is keeping a floor under BP and Royal Dutch Shell, with BP shares set to finish the day higher for the ninth day in a row, its best winning streak since July 2016, and up over 16% year to date.
Having seen a number of positive retail reports already this week, today’s statement from Currys has gone against the grain after the retailer warned on its profit outlook, due to uncertain demand and supply chain disruption. Like-for-like sales for the quarter saw a decline of 5%, and although demand was strong for gaming consoles, and white goods, the tough comparatives from last year were always going to be difficult to match. Currys says it expects to deliver full year adjusted profit-before-tax of around £155m, a small downgrade from £160m, a downgrade that has helped push the shares to a one year low.
B&M European Retail has also seen its shares slide today after Goldman Sachs reported it had sold 40m shares on behalf of SSA Investments at 585p each, reducing the firm's stake in the business to 7%.
Royal Mail shares have also slipped back after being placed on negative catalyst watch by JPMorgan Chase, on concern over higher costs, and ahead of its annual wage round.
Cineworld has got some welcome respite from its recent woes after reporting that Group December revenue came in at 88% of 2019 levels, up from 56% in November despite the various restrictions that were imposed as a result of Omicron. Its US operation led the way posting 91%, and the UK at 89% of 2019 levels. As a result of the improvements in December Cineworld said it was able to be cash-flow positive in Q4. The cinema chain also said it intends to appeal the decision by the Ontario Superior Court which ordered it to pay C$2.1bn, for its decision to pull out of the Cineplex deal.
US markets have continued to look soft in the aftermath of yesterday’s big sell off, after some pretty awful US retail sales numbers, while the latest set of numbers from the US banking sector, have also pointed to weaker demand from US consumers.
With the US closed on Monday it would seem that US investors might be reluctant to take risk into the long weekend, although the Nasdaq 100 has pulled off its lows of the day, while the Dow is struggling due to weakness in the banks.
US retail sales for December plunged 1.9% in December, while November was revised lower to 0.2%. This bigger-than-expected decline may well have been due to the fact that US consumers bought all their Christmas presents early in October, when sales rose by 1.8%, due to concerns about supply chain disruptions. The disruption caused by the spread of the Omicron variant is also likely to have played a part in today’s weak number with drops in spending across the whole retail sector. On the control group measure which ties into US GDP we saw a decline of 3.1%, while November was also revised lower to -0.5%.
JPMorgan Chase shares have slid back after Q4 earnings showed revenues came in at $30.35bn beating expectations of $30bn, while profits came in at $3.33 a share, with the bank releasing another $1.8bn of reserves. In terms of the overall business, FICC sales and trading revenue came in below expectations at $3.33bn, as did equities and sales trading, which saw $1.95bn, and it is this along with concerns over rising costs and loan demand which appears to be weighing on the share price.
Investment banking performed better with $3.21bn, which was pretty much in line with expectation, however the shares have slipped on the back of an increase in costs to $17.9bn, a rise of 11%, pushing the total expenses number for the year to $71bn. The bank has put this increase down to an increase in compensation costs as it looks to hang onto its staff. In total for the whole of 2021, JPMorgan made a profit of $48.3bn. On the retail side the banks lending operations have seen declines in home lending and personal credit. It would appear higher rates have prompted a 26% fall in home lending revenue to $1.1bn, with credit card and auto loan demand revenues falling 9% to $5bn.
Wells Fargo which is more geared towards the US domestic economy has performed slightly better, beating expectations on Q4 revenue, which came in at $20.86bn. Profits came in at $1.38c helped by an $875m release of loan loss reserves. In terms of the underlying business demand for loans painted an interesting picture of the US economy. Home lending was down 8%, while credit card lending rose 3%, while auto loans rose 17%. Corporate loans rose the most, rising 13% year on year, to $272bn. Total loans for 2021 came in at $875bn. The key takeaway from today’s numbers appears to be an improved appetite for loans in the second half of the year, largely driven by businesses. The consumer market continues to remain challenging.
Citigroup’s Q4 numbers have also proved to be a mixed bag with FICC Sales and Trading, and equities sales and trading revenue falling short of expectations at $2.54bn and $785m respectively. Investment banking and advisory have performed better, coming in at $1.85bn and $571m, helping to push total revenues above expectations to just above $17bn. The retail business also saw a big decline in revenue, with revenue falling to $1.3bn in services, while mortgage lending fell back too. Costs also came in higher than expected partly due to taking a $1.2bn charge on its South Korean operations, although profits came in better than expected at $1.99c a share.
CEO Jane Fraser, who took over last March, has decided to reorganise the bank, creating a new unit called Legacy Franchises which will be all the business units they are looking to get out of. The rest of the business looks set to be split into two divisions, Personal banking and Institutional banking. Personal banking looks set to be split into US personal banking, and global wealth management, while the institutional side will include investment banking, markets and services.
The US dollar has slipped to a two-month low this week, despite growing talk of an accelerated path for US rate rises due to concerns that the US central bank has fallen behind the curve.
This opens up the possibility that other central banks are likely to have room to tighten policy as well, which in turn has seen a paring back of US dollar long positions, ahead of the US long weekend. Put simply, markets haven’t been pricing a tightening of monetary policy from the likes of the Bank of Japan, as well as the European Central Bank, and it is something that is now coming up for consideration.
It was good news for the pound early on today as the latest November GDP numbers showed that the UK economy recovered above its pre-pandemic levels, rising by 0.9%, although the various restrictions that were imposed in December could well take some of the gloss off the performance in December. The economy bounced back strongly in November after a weak October.
Industrial and manufacturing production rose by 1% and 1.1% respectively, while construction output rose 3.5%. Services saw growth of 0.7%, which helped the economy grow by 0.9% in November, while October GDP was revised up to 0.2%.
This strong performance means that Q4 is likely to see a much better outcome, even allowing for the possibility of an Omicron induced slowdown in December. It’s been a good week for sterling; however, today’s gains have been tempered a touch by some late US dollar buying which has seen the pound slip back from its two-month highs.
Crude oil prices have continued to look resilient with concerns about geopolitical risk and a Russian incursion into Ukraine raising the stakes, as well as keeping a floor under prices. With some OPEC+ members already struggling to lift production to meet the new output targets, concern over supply shortfalls has been growing.
Gold prices have recovered after the slide last week, with the weaker US dollar offering support, along with weakness in US stock markets prompting some inflows and some haven buying, as it approaches its December highs.
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