FTSE 100 outperforms, as markets shrug off inflation concerns

Europe

European shares have got off to a stodgy start to the week, although the losses are fairly contained, while the FTSE100 has outperformed largely due to outperformance in financials and basic resources, while the FTSE250 has slip.

Rising aluminium and copper prices are helping to push the likes of Anglo American, Antofagasta and the big Australian miners of Rio Tinto and BHP higher, while oil prices above $80 a barrel are also giving a lift to BP and Royal Dutch Shell.

A sharp rise in UK yields, as investors price in the prospect of a Bank of England rate rise by year end, is also giving a lift to the likes of NatWest Group, Lloyds Banking Group and HSBC higher, in the hope that we’ll see an improvement in their net interest margins.

ASOS shares have fallen sharply after the company warned that rising costs would be a headwind to profits over the course of the next 12 months. This year’s full year numbers showed that revenues rose by 20% to £3.9bn while adjusted profits before tax rose by 36% to £193.6m.

The biggest improvements in sales were in the UK, which saw a 36% rise in sales and the US with a 22% increase. All so far so good, however the company warned that 2022 was likely to be a different ballgame so to speak, with sales growth expected to slow sharply to between 10% to 15%, with H1 revenues expected to slow to mid-single digits as a result, and profits before tax expected to fall between £110m and £140m, a fall of over 25%, due to higher freight, delivery and labour costs.

CEO Nick Beighton also announced he would be stepping down after six years in the role, adding another layer of uncertainty to a business that has seen its share price more than halve from its peaks in March.

Already under pressure due to another rights issue, this one being €1.1bn and which was announced last week, TUI shares have continued to slump after the company was forced to cancel more holidays in November, despite the various relaxation of travel rules that were outlined last week.

On the downside the prospect of higher costs and rising inflation is weighing on the likes of retailers with the likes of JD Sports, Tesco, Sainsbury as well as Ocado, all of whom are underperforming.

US

With US bond markets closed for Columbus Day, US stocks markets initially opened slightly lower, although any losses have been fairly limited, with gains in financials and the energy sector helping to pull the market back into positive territory.

Robinhood Markets shares have slipped back a little after the SEC published details of increased regulation on the trading of crypto currencies, as well as order flow. There is also speculation over an upcoming share sale, which saw the shares fall back in August, and which was subsequently delayed and may now happen as soon as this week.

Southwest Airlines have slipped back after the airline cancelled over 25% of its flights over the weekend due to various problems which included staff shortages, bad weather as well as traffic control issues.

FX

The Japanese yen is getting absolutely clobbered largely on the basis of perceptions of monetary policy divergence, with the Fed getting ready to taper, while the Bank of Japan remains very much on the back foot. Against the US dollar the yen has hit its lowest level since December 2018.

The Australian dollar is also faring better as restrictions start to get eased in Sydney, making it much more likely that the RBA will continue the policy of tapering its asset purchase program, which it extended to February, at its meeting just over 6 weeks ago.

The pound is slightly firmer getting a brief lift early on from speculation that the Bank of England may well look to raise rates by the end of this year, with a 0.15% rise being priced in as early as December. A move such as this would merely put rates back to where they were just prior to the last emergency rate cut just before the first lockdown, though you wouldn’t know it to listen to some of the hysteria about the prospect of such a move taking place. UK gilt yields have continued to rise, with 2 year yields back at levels last seen in January 2020, just shy of 0.6%. In the last three weeks UK 2-year gilt yields have more than doubled, while 10-year yields are back at 1.2%, their highest level since April 2019.

Commodities

Crude oil prices have continued to push higher, with Brent prices hitting their highest levels since 2018, while US WTI prices have moved above $80 for the first time since October 2014. This move higher could well see production increase further as shale production becomes more viable for some of the smaller producers. This could well help to cap the upside, although we could still head towards the levels we last saw in early 2014 near $100 a barrel.

A lack of wind and inability of renewables to cope with fluctuating demand has seen the price of oil as well as gas continue to surge, although there are some signs that natural gas prices may have topped out in the short term, after Russia’s pledge to supply more gas.

Bitcoin prices are back at levels last seen in May, despite concerns over regulation. Every time we hear various missives on why the crypto currency is due a big fall it defies gravity to continue to move higher, crushing the various bears in the process.