It’s been a cautiously positive start to the new week for European markets, with the FTSE 100 sliding back due to weakness in the energy sector with BP and Shell the main drags as crude oil and natural gas prices slide sharply.
Europe
This weakness is due to Saudi Arabia cutting its selling prices for Brent crude against a backdrop of concerns over a weaker economic outlook and record US shale production, as it looks to hang on to market share.
The weakness in oil prices is also weighing on Shell despite the oil major saying it expects to see a better-than-expected performance in its gas trading business when it reports its Q4 numbers on 1 February. Some of this improvement is likely to be offset by weaker profits in the chemicals and oil products part of the business. The chemicals business has proved to be a consistent weak spot over the past few quarters, sliding to a $468m loss in Q2.
Airbus shares are higher in the wake of the weekend incident with the Boeing 737-MAX 9 on the basis that it could well benefit from the fallout of another setback for Boeing and its workhorse 737-MAX fleet.
US
US markets opened the new week on a mixed note as investors continue to absorb the messages from last Friday’s December jobs and ISM services report, with the Nasdaq 100 outperforming while the Dow is lower due to a fall in Boeing’s share price.
Boeing shares have dropped sharply in the wake of the weekend incident that saw a brand-new Alaska Airlines 737-MAX 9 lose part of its fuselage, creating a huge hole in the cabin at 16,000 feet and forcing the aircraft to perform an emergency landing soon after take-off. The weekend incident is the latest setback to hit Boeing as it looks to recover from the reputational damage to its 737-MAX fleet five years after the aircraft manufacturer was forced to ground the MAX 8 after two fatal crashes caused by flaws in the flight control software.
This most recent incident raises a host of new questions about Boeing’s quality control as well as manufacturing processes, at a time when confidence in the 737-MAX is already wafer thin. This isn’t the first time Boeing has had to address manufacturing issues with the MAX, after being forced to fix misaligned drilling holes in the rear section of the 737, and concerns about loose bolts in the rudder control system.
Other airlines have also grounded their own 737-MAX 9's for safety reasons as a result of the incident at the weekend, and questions will inevitably be asked as to whether this new problem will prompt some airlines to reassess whether they even want to buy new aircraft from Boeing. There are plenty of airlines who have orders for the MAX-9, with the bigger question being as to whether passengers will want to even fly on these aircraft.
Thankfully, there were no fatalities as a result of the weekend incident, however that was probably more down to luck than anything else given that the seats next to the exit were empty. It has since been reported that the aircraft in question had come under scrutiny due to the triggering of pressurisation warning lights on three prior flights, which meant the aircraft was placed on a restricted schedule that meant it wasn’t allowed to fly over water. It hasn’t been established whether the warning lights might have been an early warning of the emergency exit door incident.
Spirit AeroSystems which manufactures the piece of the fuselage in question is also sharply lower, with the weekend incident putting both companies in the crosshairs of regulators across the world. The incident is also likely to put future orders of the Boeing 737-MAX at risk.
Apple shares are also in focus after a warning that its sales in China were continuing to come under pressure from the new Huawei handset, with broker Jefferies saying that sales were 30% lower than the same period a year ago.
FX
It’s been a quiet session for currencies with the Norwegian krone the worst performer on the back of lower oil and gas prices. Weakness in Chinese markets also appears to be weighing on the Australian dollar.
The euro is holding up reasonably well despite a poor set of German factory orders numbers for November, although we did see a welcome return to positive territory for import and exports numbers. Imports rose by 1.9%, while exports jumped by 3.7%. While the improvement in trade performance is extremely welcome, the rebound does need to be set in the context of four months of declines going back to June and July.
Commodities
Gold prices have continued to slip away from their end of year peaks as doubts about a weaker US dollar and an early Fed rate cut prompt further position adjustment. Prices are now back at three-week lows and almost back to the levels they were just before Fed chair Powell’s dovish pivot on monetary policy in mid-December.
Brent crude oil prices have slipped sharply after Saudi Arabia cut prices to reinvigorate demand, as well as trying to preserve its own market share against a big jump in US shale production, which is currently at record levels. If it weren’t for tensions in the Middle East, its quite conceivable that oil prices might be much lower.
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