European markets have undergone another lacklustre session drifting into the red after US headline inflation followed yesterday’s PPI numbers coming in a little bit hotter than expected, pushing yields higher.
Europe
The FTSE100 is once again finding support from a resilient oil and gas sector, and higher oil and gas prices with BP and Shell outperforming, while travel and leisure appears to be stuck on the tarmac.
Investors have reacted underwhelmingly to easyJet’s Q4 pre-close trading update numbers which has seen the airline confirm a return to profit for the year, saying that headline profit before tax is expected to come in between £440m and £460m. This was slightly below consensus forecasts, and while disappointing is still a vast improvement on last year.
Earlier this year easyJet said its second half performance would more than offset a poor H1. This has turned out to be true with a record performance expected in Q4 when it comes to headline profit before tax with estimates of between £650m and £750m, pushing H2 profits up to between £850m and £870m. easyJet holidays has continued to add value with an expectation of annual profits before tax of £120m.
The airline appears to be adding value across all its key revenue areas, with revenue per seat up 9%, and ancillary yield per passenger up 14%, during Q4, with load factor at 92%, begging the question as to why the shares have sold off.
On guidance for Q1 capacity is 15% up from last year, while the airline announced a big order of 157 new aircraft from Airbus worth $20bn, with an option for 100 more. The airline also said it expects to be able to generate £1bn in profits by 2026. Perhaps today’s weakness speaks to a concern that management is being a little too optimistic about the outlook, as well as the challenges facing the consumer from the high cost of living. The deal to acquire 157 new Airbus planes is also a hefty chunk of change as the various carriers stake the future on strong travel demand, and more fuel-efficient aircraft.
Wagamama’s and Frankie and Benny’s owner Restaurant Group has had its fair share of problems over the past few years with the pandemic bringing them to a head. Today the business announced that it is selling itself to private equity group Apollo Global for 65p per share, valuing the business at £506m.
Darktrace shares have slipped back after announcing a 21% decline in annualised recurring revenue to $21.1m in Q1 24, from the same period last year, while adding 126 net new customers during the quarter. Total revenue saw a rise of 28% to $161.6m. The cybersecurity company also confirmed its full year guidance of ARR growth of between 21% and 23%, with the 2nd half of the year expected to be stronger than H1. It also expects full year revenues to rise between 22% and 23.5%.
Boohoo and ASOS shares are both lower after Goldman Sachs downgraded both to sell saying that they expected both businesses to continue to lose market share to other rivals.
US
US markets opened slightly softer after US CPI for September came in a slightly higher than expected at 3.7% and 0.4% month on month.
Core prices slowed to 4.1% from 4.3% so there was a modest upside surprise in the headline number caused mainly by higher rent and fuel prices, and which has provided an uplift to US yields, which comes across as a slight overreaction given how much the numbers are within the margin of error.
Weekly jobless claims came in at 209k, in line with expectations with little reaction from the bond markets to a slightly firmer number.
Ahead of next week’s Q3 numbers Goldman Sachs announced that they have agreed a deal to sell its troubled GreenSky unit to private equity group Sixth Street, which it said would result in a 19c a share hit to its profits. This hit comes on top of the $504m hit the bank took in its Q2 numbers, with the sale expected to complete in Q1 next year. Some estimates have put the sale price somewhere close to $500m, quite a reduction from the $1.7bn valuation that the unit had last year.
Delta Airlines shares have edged higher despite cutting the top end of its full year profit outlook due to higher fuel and maintenance costs. The outlook was originally between $6 and $7, and the airline has taken the decision to pull that down to between $6 and $6.25c a share. The sharp increase in oil prices has meant that while full year revenues have risen by 20% fuel prices have gone up by 25%. Q3 profits came in at $2.03c a share on $14.6bn in revenues, while saying that Q4 profits are expected to between $1.05c and $1.30c.
Birkenstock finished its first day as a listed company rather underwhelmingly, closing 12% below its IPO price of $46. Today the shares have continued to come under pressure, slipping below $40 as enthusiasm continues to wane in the luxury sector.
Walgreens shares have pushed higher after reporting better than expected Q4 revenues of $35.42bn, while profits fell short at $0.67c a share. Including exceptional items, the company posted a loss of $180m, while downgrading its full year guidance for revenues and profits to between $141bn and $145bn and $3.20c and $3.50c a share respectively. The blame for this has been attributed to lower covid-sales and higher staff costs. Walgreens said it was looking to make savings of $1bn over the next fiscal year as it looks to close unprofitable stores and improve supply chain inefficiencies.
FX
The US dollar is stronger across the board after US CPI followed yesterday’s PPI inflation numbers and came in slightly hotter than expected. The move higher along with yields seems a little bit of an overreaction as it's unlikely to make much difference when it comes to further rate rises. While slightly hotter than expected it's well within the margin of error and could easily have gone the other way.
The pound has seen very little reaction to today’s UK August GDP numbers which showed that the economy rebounded by 0.2%, however a downward revision to July of -0.6% indicates an economy that is starting to struggle and misfire, although it’s hardly much different in this regard to its peers over the other side of the English Channel.
Services still looked solid, managing to rebound in August to the tune of 0.4% however industrial and manufacturing production remained weak. Expectations are that the Bank of England is probably done when it comes to rate hikes with uber dove Swathi Dhingra saying that only 20% to 25% of the recent rate hikes had trickled down into the UK economy.
Commodities
Gold prices hit 2-week highs earlier today on the back of several factors, the decline in yields, the more dovish tone from some Fed policymakers and an element of haven buying after the weekend events in Israel. Today’s US CPI report has prompted a modest pullback in this recent rally after the headline number came in hotter than expected. For now, the bias remains for some further modest gains towards $1,900 an ounce with support at $1,840.
Brent crude oil prices are back on the up after 2-days of losses after OPEC+ said they would continue to constrict supply in order to keep prices elevated, after the IEA warned that weaker demand was causing an element of demand destruction, as they lowered their demand outlook for 2024.
Volatility
CMC’s proprietary basket of renewable energy stocks continued to find support on Wednesday, albeit at a slower pace than had been seen of late. The upside here was more selective with Plug Power – up more than 5% - being one of the outliers. The company reported that it expects revenues to advance significantly in the years ahead, from $1.3b now to $20bn by 2030. One day vol on the basket advanced to 55.99% against 46.45% for the month.
Gasoline prices returned to lows for the year following a surprise build in stockpiles of both refined and unrefined oil products. That’s highlighting slowing demand for the product in the US, again flagging a potential economic lethargy that’s building. The underlying contract dropped by as much as 4%, leaving one day vol at 39.7% against 31.96% for the month.
One standout in the crypto space was CMC’s proprietary CryptoAll Index, a basket covering a blend of digital assets. Downside pressures appear to be prevailing here right now even though the Fed meeting minutes hinted that one more rate hike may still be necessary. One day vol on the basket advanced to 37.45% against 31.01% for the month.
There were pockets of activity amongst US Banks after a fairly anodyne Fed statement as well as ahead of the quarterly earnings season which kicks off in earnest tomorrow. One day vol on CMC’s proprietary basket of US banking stocks printed 42.71% against 36.64% on the month.
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