European stocks drift back as commodity prices drift off

Europe

European markets have slipped back today after a weak handover from markets in Asia, as investor minds turn to the possibility of a possible Evergrande default ahead of the weekend as we come up to the end of the 30-day grace period for payment of an $83m bond interest payment. The collapse of an asset sale has also raised the prospect that the company could default as soon as this weekend amidst fears over a contagion effect to the rest of the property sector.

Basic resource stocks have come under pressure, along with metals prices, after China targeted the steel and cement sectors to reduce emissions. A further aim is to accelerate restructuring in steel, primary aluminum, and flat glass, and other energy-intensive sectors. Copper prices slumped by over 3%, dragging the likes of BHP, Rio Tinto, and Anglo American lower.

Barclays shares have slipped back, trading modestly below three-year highs, despite beating expectations on profits and revenues for Q3. A decent performance from its investment bank, which saw equities and fee income beat expectations, helped to push revenue in the CIB division up to £3.1bn. Total revenues for the quarter came in at £5.5bn, thus helping to generate £2bn in profits before tax, helped by a £622m release from reserves.

When Unilever reported back in July the shares fell back sharply after the company said rising costs saw operating margins fall by 100bps in the first half of the year. Today the company said that Q3 sales rose by 2.5%, while increasing prices by 4.1%, a decent improvement on its H1 performance, as consumers absorbed the price increases through the quarter. This has helped the shares pull further away from the 7-month lows we saw earlier this week.

CEO Alan Jope warned that these price rises are unlikely to be one-offs, warning that further increases would probably start to filter through over the next six months to offset the problems caused by ongoing energy price rises and supply chain disruptions. This follows a similar trend from Nestle and Procter and Gamble earlier this week who have said they will be doing the same in response to the strains on their supply chains. Reckitt Benckiser shares have also risen on the back of today’s Unilever update ahead of the release of their Q3 numbers next week.

US

The broader weakness in European markets has seen US markets open lower today after the Dow hit a new record high yesterday. Weekly jobless claims came in at 290k, another post lockdown low while continuing claims fell below 2.5m.

Tesla Q3 numbers saw the electric car maker post another record profit, coming in at $1.86c, above expectations of $1.67c. Revenues came in at $13.76bn, another record, however, it was below expectations of $13.91bn. Automotive margins improved to 30.5% from 28.4%, with the company delivering just over 241k cars, and an over 40k increase in Q2. Most of those deliveries were Model 3 and Model Y.

Capex was higher at $1.82bn with Tesla expecting to see the Berlin factory go live and produce the Model Y before the end of the year. That is also the intention for the Texas factory, however, currently, the Berlin deadline appears more plausible given that final permit approval is pending. There was a bitcoin impairment of $51m.

American Airlines is the latest US airline to report Q3 numbers that were slightly better than expected, and posting a smaller loss than expected, at $0.99c a share. Q3 revenue was 213.3% higher than a year ago, coming in at $7.96bn, however, last year was a low bar given the prevalence of infections, and pre the rollout of vaccines. For Q4 the airline expects capacity to come in between 11% to 13% below 2019 levels, and revenue to come in at $9.24bn, down 20% from 2019 levels.

PayPal shares have continued to fall after yesterday’s reports it was looking to acquire Pinterest for $45bn. Pinterest shares on the other hand jumped to their highest levels since the end of July when they dropped sharply after reporting that they lost 24m users as lockdowns got eased, and people spent less time online.

IBM’s Q3 numbers haven’t gone down well after missing on revenues, which came in at $17.6bn. The Global Technology Services division saw sales decline 4.8% from a year earlier, ahead of the spin-off of a large part of the division into a new company called Kyndryl.

Moderna and BioNTech have edged higher after the publication of trial results this morning that a Covid booster jab restores vaccine efficacy to 95%.

FX

The pound is trading steadily after the latest public sector borrowing numbers saw government borrowing rise by £21.8bn in September, while August was revised lower to £16.8bn, as the numbers continued to undershoot the forecasts of the OBR when it last set out its forecasts earlier this year.

So far, this fiscal year the government has borrowed £108bn, and while still a sizeable amount, the better performance of the UK economy has meant that tax receipts have been better than expected.

The Japanese yen and Swiss franc are the best performers as equity markets sink onto the back foot but currency markets are by and large subdued.

Commodities

Brent crude prices have hit a new three-year peak yesterday have slipped back once again; however, they are still on course for their 7th successive weekly gain. US prices also rose, hitting their highest levels in 7 years, after data showed that inventories at Cushing Oklahoma fell to a 3-year low. Global demand remains solid, even with the slow ramping up of monthly output. It is also important to remember that OPEC output remains below the levels it was pre-pandemic.

Bitcoin prices are also giving back some of its recent gains, nonetheless, it is still well above the $60k level.