Druzhba pipeline outage weights on European markets

Europe

It’s been a mixed day for European markets with the DAX rolling over on reports that oil flows through the Southern Druzhba pipeline which supplies Hungary, Czech Republic and Slovakia, had been suspended due to non-payment of transit fees. Russia has claimed Ukraine was behind the suspension because sanctions had prevented the required payment from going through.

It’s a timely reminder, if any were needed of how vulnerable Europe is to the continued weaponisation of energy by Russia as we head into winter.

The FTSE100 is once again outperforming due to its heavier weighting in oil and gas, with the higher oil price acting to push BP and Shell higher on the day.  

After hitting a two-year low back in June IHG shares have seen a decent rebound in anticipation of a strong rebound in demand as covid restrictions get lifted and people start to travel again.

Today’s H1 numbers have come in more or less as expected, with the US business standing out with Q2 RevPAR up 3.5% on 2019 levels. On the flip side, due to the lockdown restrictions in the Greater China region RevPAR there saw a 48.9% decline. Revenue came in at $840m a rise of 49% on the same period a year ago, but was also slightly below expectations.

The most profitable region was the US which accounted for $351m of the $377m of H1 operating profits, with the hotel chain deciding to reinstate the dividend, and announcing a $500m share buyback. 

There’s been a muted reaction to the latest H1 numbers from Legal and General which has seen the insurer post a solid set of results. Profit after tax came in at £1.15bn, even as assets under management in LGIM fell 3% to £1.29trn, due to the war in Ukraine which has seen modest outflows due to heightened market volatility

Abrdn shares have slipped to the bottom of the FTSE100 after reporting a pre-tax loss for H1 of £320m. The company blamed volatility in markets for the underperformance, as fee-based revenues fell 8% to £696m, while the cost to income ratio rose to 83%, due to lower revenue.

Total net outflows of £35.9bn were largely driven by the loss of Lloyds Banking group assets of £24.4bn which came about as a result of the merger with Standard Life.  

US

US markets have opened lower, with the tech sector and Nasdaq acting as a drag on the wider market as another chip maker came out and warned on its guidance.

This time its Micron shares which are under pressure after, like Nvidia yesterday, the chip maker cut its guidance for Q4 on the back of weakening demand. Micron said that Q4 revenues were likely to come in at or below the lower end of $6.8bn to $7.6bn. This is expected to continue in Q1 which could result in the company being cash flow negative

Novavax shares have plunged after the company cut its revenue guidance for 2022. With so many companies pushing out covid-19 vaccines the market has become saturated, with the company saying it now expects sales to be around $2.3bn for this year, well below its original target of $5bn. The company posted a bigger than expected loss of $6.53c a share, as it fell further behind market leaders Pfizer and Moderna.

The warning follows in the footsteps of the disappointing numbers from BioNTech, which also saw a decline in revenue for Q2. BioNTech said it still expects to turnover around €15bn in revenues this year, with demand growing in Q4 as winter takes hold and demand picks up.

Slowing demand for cruises has seen Norwegian Cruise Lines come under pressure after warning it could slip to a loss in Q3, while revenues are expected to fall short at $1.6bn. Reports of travel disruption and delays appear to have cut through, with many people deciding to vacation closer to home. 

The woes for Vroom have continued after the online car sales company reported a 37.6% decline in Q2 sales to $475.4m, well below expectations of $545.9m. Sales fell in ecommerce as well as wholesale, while operating losses widened to $100m.  

FX

Its proving to be a bit of a mixed bag for the US dollar today, ahead of tomorrow’s US CPI report for July. The decline in petrol prices, or gasoline as they call it in the US is expected to translate into weaker headline number, however core prices could edge higher, which would be more worrying, as it would suggest inflation is becoming embedded.

The pound has slipped back from its intraday highs on reports that the UK is making contingency plans for possible power cuts in January if cold weather prompts shortfalls in supply of gas. While it isn’t a base case scenario the reports have prompted a little bit of weakness, on concerns over the UK’s reliance on imports due to the lack of domestic storage capacity. .  

Commodities

Crude oil prices look set to close higher for the third day in a row, helped by the reports on the suspension of the Southern Druzhba pipeline. At one point today it had been lower on the day, although that proved to be short-lived as the usual stories about a possible Iran deal did the rounds. 

Gold prices have edged back to the $1,800 level and a one month high, on the back of the slightly weaker tone for equity markets.  

Volatility

There have been elevated levels of price action across the listed cannabis growers in recent days. Disappointing results ahead of the weekend break saw the sector come under pressure but Monday’s trade was dominated by something of a rebound. There was no news behind the move, but the lift drove interest in CMC’s proprietary basket of cannabis growers, with the underlying adding as much as 10% at one point. Daily vol sat at 152% against 119% on the month.

Oats prices had been trading down at levels not seen since earlier last summer, but some notable gains were tacked on during Monday’s session. Again, the underlying added close on 10% which was sufficient to drive price action on the commodity. Daily vol printed 137% against 108% on the month.

Fiat currency markets started the week on a relatively calm note although downbeat inflation expectations from the Reserve Bank of New Zealand were sufficient to see the Aussie Dollar gain ground over its Kiwi counterpart. Daily vol advanced to 7.36% against 6.75% on the month.

And activity was as subdued for the majority of cryptos too, although Stellar Lumens saw its price spike off the back of news that the token had been listed on Robinhood. This drove action in the underlying, with vol against the US Dollar advancing to 109% on the day versus 63% on the month.