Europe

After starting the day in a very positive fashion, momentum for markets in Europe has tailed off, as investors look ahead to months of protracted negotiations for a new German government.

The FTSE100 appears to be lagging behind the rest of Europe’s markets although the DAX isn’t doing that much better. A decent performance from the likes of BP and Royal Dutch Shell is helping support the UK index, as energy prices continue to drive higher, with Brent crude prices now pushing up towards $80 a barrel.

A rise in bond yields appears to be tempering upside progress in some parts over concerns about a more persistent inflationary environment, although at current levels they are still deeply negative in real terms. The increase in yields is helping to give financials a lift, with the banks trading higher, although we have retreated from the highs of the day.

Also outperforming, Rolls Royce shares have hit their highest levels in over a year after announcing that its F-130 engine would be used to power the B-52 Stratofortress for the next 30 years.

The contract is said to be worth £1.9bn, and is an additional boost in the wake of last week’s news that transatlantic travel is set to resume, giving a boost to the goal of meeting the company’s target of achieving 55% EFH (engine flying hours) for this fiscal year. It was also announced that the company has agreed a deal with Bain Partners to sell ITP Aero for €1.7bn.

Coming on top of weekend reports that the government is looking to put money into its mini nuclear reactor technology, in order to alleviate and diversify the UK’s energy mix, the stars finally appear to be aligning for this major UK blue-chip.

The last four weeks have seen a remarkable turnaround in fortunes, with the shares up 20% over the past month, as investors become more confident about the company’s prospects. There still remains some way to go, in terms of the share price, but the skies do appear to be starting to clear.

Airlines have also continued their recent rebound, with the likes of IAG, easyJet, Wizz Air and Ryanair all building on their gains from last week. IAG shares are now trading at their highest levels since mid-July, while easyJet shares are at one-month highs.

Cineworld shares are also getting a bit of energy after the cinema chain reported that screenings of the new James Bond film were getting sold out quickly, while sector peer Odeon, which is owned by AMC, reported it had seen over 175k pre-sales in the first two weeks.

US

US markets, on the other hand, opened lower, with the Nasdaq and S&P500 providing the biggest drag, as the US 10 year briefly pushed above the 1.5% level for the first time since June. While these two indices are underperforming, the Dow and Russell 2000 are forging ahead with the Russell trading up to its best levels in three weeks.  

Reports that China has closed some of its factories in order to conserve power appears to be weighing on the tech sector, with Apple shares sliding back, and Microsoft also underperforming.  

Facebook shares are slightly lower after the company said it was halting work on an Instagram Kids app.

The likes of Chevron and Occidental Petroleum on the other hand are performing well as oil prices continue to push higher, as are financials with Goldman Sachs and JPMorgan Chase also getting a lift from higher yields.  

FX

After coming under pressure for a good part of last week, the pound is undergoing a bit of a rebound largely at the expense of the euro, as the prospect of months of political gridlock in Germany, weighs on the single currency. The euro wasn’t helped by comments from ECB President Christine Lagarde that the current rise in inflationary pressures is likely to be transitory, which by implication suggests that the ECB won’t be leaning in a hawkish direction whatever this week’s EU flash CPI numbers for September show.

The US dollar is more or less flat on the day, with US stock markets notable for the weakness in the Nasdaq, while the Russell 2000 appears to be on a tear, moving to a three-week high.  

Commodities

Crude oil prices, as well as natural gas prices have continued to move higher, on both sides of the Atlantic, with the brief pause we saw at the end of last week, wiped out in a sharp move higher today. Brent prices are now back within touching distance of $80 a barrel and levels last seen in October 2018, with scant evidence that they will slow down. While Brent crude prices have broken above the highs, we saw in July, it’s interesting to note that US WTI prices have yet to do so.

Gold prices continue to be driven by the vagaries of US yields, with this morning’s move above 1.5% on the US 10 year acting as a drag initially, however prices have recovered as yields have drifted back.

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