Europe

After a big sell-off in Asia markets, European markets initially started the day on the back foot, however as the day progressed all the early losses have dissipated helped by a slew of decent trading updates, and a rebound in the basic resources sector, helped by rising metals prices. This has seen the FTSE100 recover back towards the 7,600 level, and back towards where it finished on Monday, despite UK inflation hitting its highest level since 1992.

Rio Tinto, Antofagasta are both higher, despite disappointing Q4 production reports which initially saw the shares slip back. Their 2022 guidance was also a bit of a let-down, however a steady rise in copper, platinum, and palladium prices throughout the day, along with record high Nickel prices has pulled the shares off their lows of the day.

Digital education provider Pearson shares have risen strongly for the second day in a row, after reporting an 8% rise in full year group sales, and operating profits that are expected to come in at £385m, a rise of 33%.

The company reported an 18% rise in sales in its largest business of Assessments and Qualifications, while English Language learning also performed well, rising 21% in Q4 and 17% year on year.  

Burberry shares have risen after the luxury fashion chain reported Q3 sales rose by 26%, on a two-year basis and were up 15% year on year.  Retail revenue was up 5% to £723m with decent growth amongst a younger cohort of customers helping to drive improvements, by way of activations on Instagram and Tik Tok.

Guidance on operating profits was adjusted higher with expectations of an increase of 35%, helped by an improvement in currency effects. Adjusted operating profit is now expected to be between £500m and £515m.

Sector peer Richemont is also seeing strong gains in Switzerland after posting a similarly decent Q3 trading update, which saw sales rise 32%, to €5.66bn, crushing expectations, helped by very strong demand for watches and jewellery. The growth came across all regions, with Europe, Asia and the Americas seeing strong demand.

Unilever shares have also enjoyed a bit of a respite after two days of losses, rebounding from their lowest levels since February 2017, after getting an upgrade from Soc Gen, although we could also be seeing some opportunistic buying in the hope the recent decline prompts a bit of M&A interest. There is also the realisation that while the ambition to improve the business is there, no fourth bid is likely to happen.       

This morning’s trading update from pub chain JD Wetherspoon confirmed the warning from 13th December that the company would slide to an H1 loss due to the Plan B Covid restrictions implemented by the government just before Christmas. CEO Tim Martin did express confidence that H2 would be much better once all restrictions are removed and the weather warms up, which has seen the shares finish higher on the day.

The rest of the RNS announcement was a popcorn inducing evisceration of the government over “Partygate”, investment manager Blackrock, as well as UK tax policy relative to other outlets. The missive to the government over how it should have gone about keeping the pubs open was especially noteworthy and quite amusing.       

US

US markets at one point looked on course to open quite a bit lower in the premarket, however the resilience of European markets appears to have helped steady the ship a touch after yesterday’s hammering, as well as a slight softening in bond yields, although the early progress higher is finding some resistance.  

After seeing Goldman Sachs shares slide sharply yesterday on concerns over higher costs, and weaker investment bank revenues, today’s Bank of America numbers were able to shrug off those concerns. On the revenues front we saw similar trends with Q4 FICC trading revenue coming in short at $1.57bn, well below $1.76bn forecasts. Total revenues came in at $22.06bn almost $2bn higher than a year ago, however the numbers were still below consensus. Profits came in at $0.82c a share, beating consensus of $0.77c a share, with the numbers being boosted by $489m of provisions coming back in.   

On expenses the bank was more upbeat, saying that while they increased in 2021, they expected them to remain steady through 2022, which along with a strong performance from the retail bank has seen the shares move higher.

Morgan Stanley shares also got a boost from their Q4 update which saw revenues come in slightly above expectations at $14.5bn, and profits of $2.08 a share. Unlike other Wall Street banks compensation expenses came in below expectations at $5.49bn. Trading revenue was a weak point, down significantly from last year, however M&A advisory more than compensated, while equities trading outperformed in contrast to its peers. Wealth management has also been a big driver with $6.25bn in revenue on assets under management of $6.5trn.

In a lesson for Unilever, sector peer Procter and Gamble has seen its shares rise after the company reported better than expected Q2 numbers. Q2 sales saw a rise of 6% coming in at $21bn as an increase in prices helped to mitigate higher costs. As a result, the company upgraded its full year sales growth forecasts to between 4% and 5% from 2% to 4%. In an interesting side note CEO Jon Moeller also ruled out an interest in GlaxoSmithKline’s consumer healthcare business, although that probably doesn’t preclude a bid for Unilever, which appears to be in a hole of its own making.  

FX

After yesterday’s gains the US dollar has slipped back a touch with the key beneficiaries being the commodity currencies of the Australian and Canadian dollar and the Norwegian krone, helped by firmer metals and oil prices.

The pound has been subdued despite UK CPI inflation rising to its highest level since 1992 in December, moving up to 5.4% from 5.1% in November, although it has pushed up to its highest levels against the euro since February 2020.

The most notable takeaway from today’s numbers has been a sharp rise in food and non-alcoholic drinks, along with increases in the prices of clothing and household goods, as the various supply chain disruptions we’ve been hearing about for several months start to filter down into consumers wallets.

On the RPI measure, prices rose even faster, rising to 7.5%, from 7.1%, making it odds on that the Bank of England will raise rates again when they meet at the beginning of February.  

It is almost certain that we will see another 0.25% rise in rates to 0.5%, given that prices are likely to rise further in the coming weeks.

The reason the bank decided to act in December was over concerns that the risks to inflation were becoming embedded. Today’s numbers will only serve to reinforce that concern, and with the Bank of England’s own forecasts, showing that we can expect to see an inflation rate of 6% by the spring, it would be a huge surprise for them not to act next month.

The central bank will no doubt face criticism from some quarters if it does move on rates again, but it should also be remembered that interest rates would still be below the levels they were before the pandemic, even as inflation has risen from 4.2% to 5.4%, in the space of two months. For the Bank of England not to act on the February 3rd would probably be perceived as yet another communications shambles.

CPI Inflation in Germany was also confirmed at its highest level since 1992, at 5.3% in December.

Commodities

We’ve seen fresh 7-year highs for both Brent and US crude oil prices, as concerns over geopolitical tensions serve to keep a floor under prices, while a pipeline outage between Iraq and Turkey has added another layer of complexity to the story for oil prices and serves to keep markets on edge.

Metals prices have also seen a big leap to the upside, with platinum, palladium and copper prices all surging higher, while the weaker US dollar has seen the gold price look to retest its recent highs after yesterday’s sharp fall.      

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