FTSE under pressure on tumbling oil prices

Draghi stifles the euro market
by Ipek Ozkardeskaya

The severely downbeat speech from the ECB President Draghi stifled the euro market this morning. Euro shortly slipped below 1.07 mark as Draghi said that the bond purchases program could extend past September 2016 if needed. The possibility of deeper negative rates from December remains well alive. The market is already positioned deeply short on anticipation of a further unorthodox move from the ECB. Draghi’s speech today has been a reminder, not a surprise.

The Eurozone sovereign bond yields move south today, the core-periphery yields remain tight. The rally in Eurozone bonds could not continue interminably however, as the combination of low/negative yields and depreciation in euro will jeopardise gains in capital and curb marginal appetite in purchasing disproportionately expansive sovereign debt from the Euro area. The risk of volatility rises as distortion in the Eurozone bond market amplifies.

Released this morning, the German consumer inflation was flat in October while consumer prices in France improved in line with expectations. As Christmas approaches, further improvement in European retail sales and inflation could give a bump to the economic activity and a lukewarm smile to the ECB. The positive seasonal bias will certainly not move the ECB away from its dovish policy path.

There is no taboo, no uncertainty; the European Central Bank is full-heartedly fighting to revive inflation and growth in the zone. The combat involves a cheaper euro and export-driven companies.

The sharp drop in euro-dollar basis swaps hints at sturdier selling pressures in EURUSD. Traders continue chasing top selling opportunities to strengthen their euro short positions moving toward December, where a potential rate hike by the Fed could even bring the parity on the radar. Political issues in Portugal is also a rising downside risk.

European equities in red

European equities opened in the red. In Germany, utilities lead losses: RWE 9-7%) and E.ON (-3.2%).

RWE profits fell by 29% as electricity prices fell by circa 10% in the past nine months. On top, Germany moves to renewable energy sources, suggesting a long-term downside shift in company’s future revenues and profits. In this context, the stock price is expected to remain under pressure regardless of the energy prices. A rapid glance to analyst coverage shows that the majority remain on hold with a twelve month average price target set at €14.42. This is well below the historical average of €40.84.

Siemens (+2.23%) missed earnings estimates in Q4, while industrial profits beat expectations as sales surged by 13.8%. The company raised dividend and announced the second share buyback as no growth in profit margins is expected in 2016.

FTSE under pressure on tumbling oil prices
by Brenda Kelly

It’s funny how the Federal Reserve feel that any concerns they had over China in September have now dissipated as various members are of the view that negative spill overs have not materialised. Yet corporate earnings this morning and the cautious outlook would suggest that the Fed might want to take a second look. The FTSE is having difficulty rising above the 6300 marker this morning and is presently off by 0.68% with only 32 out of 63 stocks catching a bid.

Sainsbury (-2.92%) continues to fall in the wake of yesterday’s earnings announcements The fact that Lidl is planning to expand its store footprint in the UK is unlikely to be helping either.

Burberry (+0.97) First half profits increased despite the slowdown in China and warnings earlier this month that the outlook was challenging . A better than expected 3% rise in H1 underlying profit was helped by cost savings. Pre-tax profit was at £152.9m against consensus £144.2m. The outlook for H2 has not changed – the firm expects mid-single digit % growth in comparable sales.

3i (1.24%) Shares are up 9.4% this year and the firm has limited its exposure to Asia and South America and focussed more on Europe and North America. From BBG: ‘’ The macro and market environment has clearly deteriorated over the course of this year and the steps we have taken since 2012 to create a more resilient business are proving their value,” Chief Executive Officer Simon Borrows said in the statement. ‘’ The outlook for growth is uncertain in many parts of the world, including the Eurozone and China, and this is resulting in volatility across financial markets’’

The tumbling oil prices on Wednesday as weekly crude oil supply data showed a bigger than expected glut is plaguing some of the big oil companies again this morning.

BP (0.97%)
Royal Dutch Shell ( -2.64%)

Some consolidation in the oil sector is inevitable but has been a long time coming in the face of the decline in the oil price and the uncertainty of its direction from here. The world’s six largest publicly traded oil producers have more than a half-trillion dollars in stock and cash to snap up rival explorers. Exxon Mobil Corp. tops the list with a total of $320bn for potential acquisitions. Chevron is next with $65bn in cash and its own shares tucked away, followed by BP Plc with $53bn. It’s a question now of watching this space for any opportunities that may arise as a result of M&A.

Goldman Sachs released a note stating that the market is underestimating US inflation. It does not predict a rise in oil prices but expect US consumer prices to rise even if oil continues to consolidate at current levels. Sliding energy prices and slowing global economic growth have weighed down a measure of inflation expectations known as the 10-year break-even rate -- the gap between yields on Treasury notes and inflation-linked debt of that maturity.

Rolls Royce (-19.79%) The stock is off the lows, having initially dropped 22% in early trade on the back of yet another profit warning. Weaker demand puts its profits this year at the lower end of guidance. Next year’s guidance is the real issue where earnings are expected to suffer a £650m hit. Plans for restructuring are ahead and will be announced on November 24. Likelihood of dividend cut is also playing havoc with the share price this morning and it has removed over 9 points from the FTSE.

BAE SYSTEMS (+2.97%) - According to Reuters the company is in advanced talks to sell U.S. manpower and services businesses to Veritas Capital Management for >$1bn.