China regulatory risk weighs on sentiment

Europe

European stocks initially started the week on a softer note, largely due to a weak lead from Asia markets which fell back sharply as Chinese regulators continued their crackdown on the tech sector, as well as broadening their gaze towards the private education sector.

As the day progressed and we got closer to the US open, the losses have slowly started to diminish with the basic resource sector helping to pull the FTSE100 off its intraday lows, although the DAX is underperforming after the latest IFO survey appeared to suggest that the German economy is starting to slow in the wake of rising costs and Delta variant infections.  

Mining stocks in particular have been looking strong after Anglo American reported a bumper H1 earnings report, posting record earnings of R63bn.

Today’s report kicks off a number of miners updates this week, with the sharp rise in commodity prices seen over the past few months helping to push Anglo’s total revenues much higher in H1. Revenues came in at R107.5bn, a 155% rise from last year, which in turn helped to push earnings up to a record R63.3bn, an over R50bn increase from the same period a year ago.

The rise in revenues and profits was driven by sharp increases in the production of platinum, palladium and rhodium, with nickel and copper also doing well, with the company saying it would be paying out a dividend of R175 a share.

This performance has raised expectations that we’ll see a similar outperformance from the likes of Rio Tinto in the next couple of days, and Glencore next week.

Having seen easyJet post a smaller than expected Q1 loss last week, due to a reduction on costs, Ryanair has followed suit this morning, although notably the loss is higher than the same period last year, when comparatives would have been worse, due to the first lockdown

The cancellation of its Easter flight program and lower than expected passenger numbers in May and June saw losses rise to €273m, an increase of 47%, from the same period last year. Q1 total revenues rose over 200% to €370m, driven by a rise in passenger numbers to 8.1m from 0.5m, however an increase in costs to €675m pushed losses higher.    

The airline does appear more optimistic about the outlook with expectations that bookings could double from over 5m in June to over 10m in August, assuming no further setbacks. Projecting forward the airline went on to say it was optimistic about returning to profit in Q2, and breaking even on a full year basis.

This more optimistic outlook appears to be translating into a positive start to the week for the rest of the sector, with IAG, Jet2 and easyJet building on the rebound we saw at the end of last week.

On the downside the underperformers in health care with AstraZeneca lower despite winning EU approval for its Ultomiris drug for children and adolescents.  

US

US markets opened slightly lower today after the record closes at the end of last week, with some heavy falls in Chinese tech names, with Alibaba, Tencent and JD.com seeing some heavy falls on the back of similar weakness in their Hong Kong listings. Chinese education companies have also seen heavy falls after regulators banned the companies from making profits, raising capital, or listing overseas, with New Oriental Education, TAL Education and Gaotu Education dropping sharply on the open.

On the other side of the coin Coinbase is higher on the back of today’s rebound in bitcoin, which only days after dipping below $30k looks to be heading back towards the $40k level.

In M&A news Aon’s proposed $30bn acquisition of Willis Towers Watson has broken down after the US Department of Justice said it would look to take action in the courts to block the merger. The decision to pull out of the merger Aon will have to pay a $1bn break fee, perhaps taking the view that a long-drawn-out court case would cost them more in the longer term. Sometimes in the business world its better to take your pain up front and move on, and it appears that’s what Aon has decided to do rather than engage in costly disposals which would negate the whole raison d'etre behind the deal.

FX

The US dollar has slid back today, ahead of the start of this week's Fed rate meeting, which is due to start tomorrow.

The pound is amongst one of the better performers, after economic forecasts from Ernst and Young that suggested the UK economy is growing at the fastest rate since WW2, and would grow by 7.6% this year. This seemed to outweigh dovish comments from Bank of England MPC member Gertjan Vlieghe that the central bank should not scale back its stimulus until well into next year. The lack of reaction to Vlieghe’s comments also suggests that markets don’t care what he thinks, and why would they, he’s leaving the MPC next month.   

Commodities

Oil prices have slipped back from their recent highs, with demand concerns being cited as a consequence of recent flooding, not only in Europe but in China as well, with another typhoon set to make landfall in Japan at some time tomorrow.

Bitcoin has shot higher over the weekend with a number of theories being put forward for the sudden turnaround in fortunes, from a short squeeze, to the reports that Amazon’s advertising of a digital currency product lead suggests the company might be looking to accept digital currencies as payment at some point in the future. That comes across as quite a leap, and probably speaks more to the flighty nature of positioning in the crypto space, given that any move by Amazon to adopt cryptos is likely to be some way off.  

Arabica coffee has seen more gains today, pushing close to 7-year highs, on supply concerns after frosts hit Brazil raising concerns over damage to its latest crop, exerting further upward pressure on prices, which are already up over 50% year to date.