European stocks drift as airlines lose altitude, bitcoin hits a record

Europe

It’s been a rather slow day for markets in Europe today with little in the way of direction one way or the other, with the focus largely on company results and rising inflation risks, with the FTSE100 on course to trade in its smallest daily range this year.

By and large, companies are reporting decent numbers with an ability to pass on rising costs, without a significant impact on their sales growth numbers. While that is encouraging given the build-up in savings levels over the pandemic, most of this ability to pass on these costs predates the recent surge in energy prices, which means that the barriers to it continuing are growing.

Consumer goods company Nestle this morning followed US-based Proctor and Gamble yesterday, by warning that it would have to start raising prices further to offset the price rises its already implemented in the current quarter. The company went on to upgrade its full-year guidance as organic sales rose 7.6% for the 9 months to September. The company’s CFO said he expected to see prices rise even further in Q4, and next year to maintain margins against rising input costs.

This decent set of numbers from Nestle has helped the likes of Reckitt Benckiser and Unilever outperform today.

Burberry is also higher after announcing the appointment of current Versace CEO Jonathan Akeroyd, from 1st April 2022, as the replacement for Marco Gobbetti, who is leaving at the end of this year.

In August the Deliveroo share price finally recovered all its IPO losses to trade back at its 390p float price, although it turned out to be rather short-lived, with the shares slipping back below 300p at the end of September, on an expectation that delivery numbers might slip back with the easing of lockdown restrictions in Q3.

H1 revenues came in at £922.5m while the company narrowed its losses to £27m. Today’s Q3 update keeps the company on course to meet its full-year revenue target of £1.8bn, with management raising guidance for the year for GTV growth to 60-70% from 50-60%, with margins kept unchanged at 7.5% to 7.75%. Monthly active users have increased to 7.5m, a rise of 56% on 2020, however, they have declined from Q2’s 7.8m, probably down to the easing of lockdown restrictions, as people go out and about more.

At the beginning of September, a wave of optimism broke over the travel sector as the prospect of the lifting of restrictions on overseas travel came into focus, which in turn prompted some decent gains for airlines. This light at the end of the tunnel for airlines was welcome news for the beleaguered travel sector given how it has borne the brunt of various lockdown restrictions.

Unfortunately for the airlines, the light at the end of the tunnel has turned out to be the train of rising fuel costs, higher airport charges, and the prospect of further Covid restrictions coming in the other direction, with the likes of IAG, EasyJet, Lufthansa and TUI unable to catch a break with TUI dropping to its lowest levels this year. It's hard to think of a bigger own goal than Heathrow Airport hiking their charges by 56% at the very time that fuel prices are surging, and infection rates are on the rise again. Gatwick and other regional airports must be rubbing their hands.

Financials have also slipped back, with UK gilt yields slipping back in the wake of this morning’s CPI numbers, which came in slightly below expectations and in turn is translating into some underperformance from the likes of Barclays and Lloyds Banking Group.

US

After 5 successive days of gains, US markets have edged modestly higher in early trade, with the focus remaining very much on company results, after Netflix’s decent numbers yesterday, although the shares have fallen back in early trade, on the back of some profit-taking and perhaps the downgrade to Q4 profit and margin expectations.

The shares initially popped higher in the post-market in the aftermath of yesterday’s Q3 numbers, after subscriber growth came in ahead of expectations at 4.4m, half of which came from APAC, while Q4 numbers were pushed up to 8.5m.

Revenues remained solid at $7.48bn with an expectation that we’d see $7.7bn in Q4. On profits Netflix was more downbeat for Q4, cutting its expectation to $0.80c a share due to higher costs from new content, which will drive its margins down to 6.5% in Q4, from 23.5% in Q3.

United Airlines, who warned that booking levels in August were likely to be lower and continue to be subdued into September and October, yesterday reported Q3 numbers that were slightly better than expected, posting a smaller loss than expected, at $300m or $1.02c per share. Operating revenue was better than expected, coming in at $7.8bn, but still down 32% from 2019 levels. The biggest risk for airlines now that travel restrictions are starting to be relaxed is the rising cost of jet fuel, which in turn will result in higher fares as airlines look to protect their margins.

FX

The pound has slipped back after the latest UK CPI numbers for September came in slightly softer than expected at 3.1%. PPI input prices also came in short of expectations at 11.4%, but still rose from the levels in August, while RPI excluding mortgages hit 5%.

On balance, while the numbers were weaker than expected, the slight miss doesn’t make it any less likely that we won’t see a big uptick by the end of this year, given that most of the miss was down to base effects from a year ago.

The euro has looked well supported today after the latest German PPI hit its highest levels in over 40 years at 14.2%. The news that Bundesbank President Jens Weidmann has decided to step down after ten years at the helm is welcome news for those of a dovish persuasion when it comes to monetary policy at the ECB. He has been a consistent and notable critic of the ECB’s ultra-loose monetary policy over the last ten years, and while he has cited personal reasons for his decision, his departure will be a significant blow to those who want the ECB to be less political when it comes to bond-buying and monetary policy decisions. It seems probable that after ten years of having his concerns over inflation risks ignored, he’s decided that he’s had enough and that someone else can have a go.

Commodities

Interest in bitcoin in the wake of yesterday’s new ProShare ETF launch has helped to push the cryptocurrency to a new record high this afternoon above $65k. All the while gold continues to play second fiddle to crypto as the inflation hedge of choice, and while it has edged higher today, its performance year to date has been pitiful, down 8%, while bitcoin is up over 90%.

After a positive session yesterday that failed to take out this week’s peaks, crude oil prices have slipped back after the latest US API inventory data showed that crude stocks rose by 3.3m barrels. For now, prices appear to be finding support at the lows this week at $83.60, however, a move below here could trigger a move back towards $80 a barrel and offer a brief respite to consumers.