Mixed earnings for Europe as battle against inflation in UK takes step forward

Corporate updates are dominating this morning after HSBC’s earnings report contained the surprise news that its CEO is stepping down after 5 years in the job. However, HSBC’s share price is rising on Tuesday morning and is higher by nearly 2%, as the market focuses on the buyback, decent profits and strong net interest income along with an expected drawn out succession plan.

Banks lead the FTSE 100 as markets cheer HSBC results

HSBC’s earnings report was solid, sales were 2.8% stronger than Q1 2023 at $20.75bn, and, crucially, net interest income also grew relative to last quarter and was $8.65bn, vs. $8.28bn in Q4. The net interest margin was 1.63%, above estimates of 1.56%. Revenues from trading were also stronger with global banking and markets posting revenues of $4.46bn, up 1.2% YoY. This further adds to evidence that the rally in stock markets did some heavy lifting for global banking revenues in the first quarter of this year. Profits before tax were $12.65bn, which were 1.8% lower than a year ago but still higher than the $12.61bn analysts expected.

Some weak spots in the report include wealth and personal banking revenue. This is a competitive space and HSBC fell short, posting revenues of $7.16bn, which is 21% lower YoY. Its operating expenses also rose, jumping by 7.4% YoY as it embarks on its growth strategy, although at $8.15bn, operating expenses were slightly lower than the $8.21bn expected.

A change in leadership at HSBC may not hit the share price

The bank also announced a $3bn buyback, which was expected. Forward guidance remained unchanged, and the focus now shifts to finding Noel Quinn’s successor. However, after only four years in the role, we don’t think that his stepping down will have a major impact on the stock price, as he will remain in the roll until a successor is found, which may not happen until later this year.  The stock reached its highest level since 2019 on Monday, however, it has still not managed to surpass its March 2019 high of 680.60, and the stock has barely budged on a 5-year time line. Under Quin’s tenure, the stock price has risen by approx. 25% on an annualized basis, which is a decent return, and is roughly in line with other major UK and US banks. It will be interesting to see where the net is cast to find Quinn’s successor.

UK banks are the leading sector in the FTSE 100 on Tuesday, and they are rising broadly, with HSBC and Standard Chartered leading the charge.

FTSE 100 outperformance continues

The FTSE 100 has risen this morning,  as there has been a wave of upgrades to the mining sector, including Rio Tinto and BHP, which could boost the FTSE 100’s mining sector. Whitbread, the owner of pubs, restaurants and the Premier Inn hotel chain, reported revenue of £2.96bn, up 13% YoY, pre-tax profit of £561mn, vs. $562mn expected, is probably close enough to be considered a decent report. However, it is planning to focus more on hotel rooms and is cutting 1500 jobs as it closes 200 of its restaurants. Whitbread shares are up 0.6% at the open, as the markets look through some slight earnings misses and gives its tacit approval of a switch in focus from restaurants to hotels.

The story of two car makers

Elsewhere, there is a story of two car markets going on right now. Volkswagon shares are down more than 2% after it reported weaker Q1 profits and slow sales at the start of the year. Net profit was EUR 3.7bn, down 20% YoY, although the company has maintained its 2024 profit forecast, expecting the Q1 weakness to be a temporary blip. Sales were also 2% lower than a year ago. The contrast could not be more stark between Volkswagon and Tesla. While Tesla also reported weak sales and dramatically reduced profits compared to a year ago for Q1, its share price surged 15% on Monday after it announced a tie up with Chinese tech giant Baidu in order to provide its full self-driving technology, which could be a big revenue driver for the EV company. China Is an important market for Tesla, and while sales slow in Europe and the US, as Volkswagon’s results show, the focus is now on growth in China. As you can in the chart below, which shows Volkswagon and Tesla, normalized, over the past year, Tesla is outperforming VW, which shows the sharp reversal in its fortunes as we move through Q2.

Source: XTB and Bloomberg

UK prices fall broadly, which supports BOE rate cut hopes

In the UK there are further signs that the disinflation trend continues to take hold. For April, the BRC shop price index fell to 0.8% YoY, down from 1.3% in March. The big news in this report was the decline in non-food prices, which dipped by 0.55%, and are at their lowest level since 2021, led by clothing and footwear, which are back at Oct 2021 levels. Prices rose at a slower pace across the board, with books, stationary and home entertainment the outlier, seeing prices rise in April vs. March. Overall, this report supports the BOE’s view that inflation will fall sharply this month, and it could pave the way for the BOE to cut interest rates. The market is expecting the first UK rate cut in July, this report is supportive of that assessment.

Overall, Risk sentiment is mixed on Tuesday, the FTSE 100 and the FTSE MIB are the only risers in the European markets and S&P 500 futures are pointing to a lower open for US stocks.