Today's Markets: Stocks firmer, oil nearing top?

European tech stocks lead the way, and US big tech on a more positive footing

February 2, 2022

Alphabet release bumper earnings report
Ocado leads FTSE 100 with 7 per cent gain
MicroStrategy double down with Bitcoin purchase

European tech stocks led the main bourses higher after a bumper earnings report from Alphabet (GOOGL) and generally more positive risk sentiment as Wall Street rose on Tuesday for a third straight session. The FTSE 100 climbed about half of one percent in early trade, approach the intra-day highs from last week. The DAX printed above 15,700 in early trade before paring some of those gains. Ocado (OCDO) led the FTSE with a gain of 7 per cent on an upgrade from Credit Suisse (0I4P). Vodafone (VOD) rose after its Q3 update was largely in line and Nick Read said the company was "committed to creating value for our shareholders through proactive portfolio actions".

On Tuesday, the S&P 500, Dow Jones industrial average and Nasdaq all rose about 0.7 percent. Energy was a leader as Exxon (XOM) beat on the top and bottom line thanks to surging oil prices, whilst free cash flow from operations was $48bn for the quarter – the best since 2012.

Companies

Differing fortunes for big oil in the US

The two US energy giants have kicked off earnings season with different pictures of the end of 2021. Exxon-Mobil (US:XOM) comfortably outpaced analyst expectations, thanks to strong oil and gas prices, with cash flow from operations for the December quarter at $15.2bn, almost a fifth ahead of consensus expectations. Chevron (US:CVX) came well below expectations.

Cash flow from operations before working capital was $9.4bn, 17 per cent below consensus. Jefferies analyst Giacomo Romeo said it was a “weak performance across the board” from Chevron. Still to come this week is Shell (SHEL) on Thursday, while BP (BP.) will report its December quarter earnings next week.

Third Bridge analyst Allegra Dawes said Shell’s numbers would arrive in a unique context compared to the other energy majors, given the divestments and corporate changes in recent months. “Shell closes the books on 2021 on much firmer financial footing than where it was a year ago, but the company still has critical investment and capital allocation decisions in front of the leadership team,” she said. AH

Games Spac to launch next week

London investors will get a chance to invest in a pure-play buzzword opportunity from the Games Workshop (GAW) founder Sir Ian Livingstone, when his Hiro Metaverse (HMA1) special purpose acquisition company (Spac) shares go live next week. This morning, the company announced a successful IPO, raising £115mn at a price of £10 a share.

Its acquisition remit is broad: Hiro said the focus would be on the sectors of “video games, esports, interactive streaming, GenZ social networks, connected fitness and wellness and metaverse technologies”. Its shares have started conditional dealings and admission to the London Stock Exchange on an unconditional basis is expected on 7 February. AH

GSK set for $1bn patent payout

The interminable patent litigation that characterises the day-to-day operations of the major pharma companies turned to GlaxoSmithKline’s (GSK) advantage after a settlement between US pharma company Gilead (NASDAQ: GILD) and ViiV Healthcare brought a long-running dispute over patents for HIV antiretrovirals to a close. ViiV, which is 78 per cent owned by GSK, with the balance held by Pfizer and Japanese company Shionogi, will receive a $1.25bn (£912mn) upfront payment and Gilead will also pay a royalty of 3 per cent to HiiV on all future US sales of its product Biktarvy (2020 sales: $6.09bn) - the underlying patents for which were the cause of the dispute. GSK will indirectly benefit from the settlement as this will boost the fair value of its HiiV investment in its forthcoming full-year results, which are due on 9 Feb. JH

Mixed bag for Glencore amid merger rumours

Mining giant Glencore (GLEN) has reported positive copper, nickel and coal production numbers for the December quarter, while zinc and key battery metal cobalt output came in below analyst estimates. The update comes after a Bloomberg report that the world’s largest miner, BHP (BHP), was looking into a merger option with Glencore, although neither company has confirmed talks.

For the full year, The miner’s key product, copper, saw a 5 per cent drop after the sale of the Mopani mine in Zambia. Guidance for 2022 shows another drop is likely, with production forecast at 1.15mn tonnes for the red metal. Glencore will release its 2021 earnings numbers on 15 February, with consensus forecasts seeing cash profits more than doubling from 2020 to $21bn (£15.5bn). AH

Alphabet’s strong advertising revenue pleases the market

Alphabet (GOOGL) beat analyst expectations in its Q4 earnings thanks to a surprisingly strong performance from advertising revenue. There was a fear that Apple’s new privacy settings would hit returns, given that Facebook had to lower its guidance at the end of last year. However, advertising sales rose 33 per cent to $61.2bn compared to the same quarter last year.

This helped total revenue increase 41 per cent for the full-year. The operating margin also jumped 8 percentage points to 31 per cent.

The Google Cloud was the fastest growing division with sales increasing 45 per cent for the quarter and this helped it decrease its operating loss by 28 per cent to $890mn. Analysts are now expecting Google Cloud to generate $1.9bn of annual operating profit by 2024.

The board announced it would be doing a 20-for-one stock split “in the form of a one-time special stock dividend”. On 1 July, each shareholder will receive a dividend of an additional 19 shares of the same class of stock.

Alphabet’s share price was up 9 per cent. Should underpin confidence, which is already returning in beaten down tech names like Netflix (NFLX), which is up 20 per cent over the last 5 sessions after another +7 per cent rise yesterday. ARKK was also higher. After all the tumult of January, solid earnings can act as a catalyst for gains. AS

Monzo to take on wealth management?

While relatively small on their own terms, the challenger fintechs have an ability to keep executives at larger banking institutions awake at night, as their low cost model easily puts the high street banks in the shade. From starting out by taking on unfashionable areas like currency exchange and transfers and quickly creating and dominating a new market segment, an intriguing development could be in the offing in areas that are traditionally the preserve of the large institutions.

It looks like Monzo, one of the leading online-only challenger banks, could be about to muscle in on the higher margin wealth management business currently dominated by the big four. Interest in such a move has been sparked by a recent job advert on the company’s website looking for a general manager, investments to “Lead the vision, strategy and execution of the investment and wealth product at Monzo from the ground up.” Monzo currently has no presence in this area. Monzo certainly has the financial firepower to expand its product offering - over the course of 2021 the company raised £200mn in new capital from investors and expects to be profitable on an ongoing basis this year. JH

Crisis averted in carbon dioxide supply

A last-minute deal has been struck to avert a potential CO2 shortage in the UK, easing supply issues for makers of fizzy drinks and draught beer. Shares in beverage makers Britvic (BVIC) and FeverTree (FEVR) continued an upward trend, rising another 1 per cent each on Wednesday.

Supply of CO2 has been an issue in the drinks industry for years, stemming from the small number of producers in the UK, rising energy costs at the plants that produce it, and no easy substitute for the finished product.

The latest deal secures a price from buyers for CO2 from CF Fertilisers, which currently delivers 60 per cent of the country’s supply. CF shut down fertiliser manufacturing operations - from which CO2 is a byproduct - last year because of high gas prices.

Broker Jefferies said the deal could be positive for drinks makers, since it removes the “potential overhang from either disrupted supply or significantly higher costs to source CO2”, at a time when trade in pubs and restaurants is starting to recover.

But it may be too soon to celebrate. The deal is only expected to last until spring, and does not address the longer-term supply issues the industry faces. MT

Near-term oil top? Everyone talking about $100-a-barrel crude reminds me of several previous situations that don’t look too dissimilar. Technicals point to being near-term overbought even if the backwardation points to a very tight market. Looking at a potential MACD bearish crossover in the offing and possible retest of the $82 area first, and possibly $75, even if the longer term trend remains upwards. Looks to me like similar to July and October 2021 tops. Russia? This makes it ‘different this time’ for sure. Hard to call but there is only so much geopolitical premium available at any one time. Variants not like previous tops as well – Covid won’t drag like it did last year. Focus today on both the OPEC meeting - not expecting any surprises but then it wouldn’t be a surprise if you were expecting it - and US crude oil inventories. API reported a surprise draw of 1.65m barrels, vs expectations of a build of 1.8m barrels, indicating a tighter market and could be a marker for the EIA figures.

YOLO: More doubling in, averaging in but in the wrong direction. Diamond eyes MicroStrategy (MSTR) CEO Michael Saylor bought the dip in Bitcoin. Yesterday he tweeted: “MicroStrategy has purchased an additional 660 bitcoins for ~$25.0 million in cash at an average price of ~$37,865 per #bitcoin. As of 1/31/22 we #hodl ~125,051 bitcoins acquired for ~$3.78 billion at an average price of ~$30,200 per bitcoin.”

Scroll back about 9 months and Saylor was saying MSTR owned 92,079 bitcoins acquired at an average price of about $24,450 per bitcoin. So that is averaging up, which is fine, but does mean you’re incrementally edging closer to being underwater with prices are where they are. Obviously Saylor does not think that prices will fall or if they do, will ultimately bounce. But what if they don’t? What if the bubble is pricked? MSTR is down 33 per cent YTD, Bitcoin is sideways around the $38k level this morning.

Back to the more mundane macro picture. EZ inflation due today... UK shop price inflation jumped from 0.8 per cent in December to 1.5 per cent in January. Later today we have the US ADP jobs number – (NFP on Friday) as well as earnings from Facebook/Meta (FB), Qualcomm (QCOM) and Spotify (0SPT).

In FX, the dollar remains on the back foot still after the Friday peak. GBPUSD trades comfortably above its 100-day moving average at 1.3530. The euro is also firmer against the greenback with EURUSD at 1.1280 area, looking to recover the 61.8 per cent retracement of the move from the March 2020 low to January 2021 high. Both pairs trying to regain the bullish momentum but it hasn’t fully flipped against the dollar just yet.

Finally, the Fed’s Harker on the wires yesterday: balance sheet reduction will be swifter and steeper than last time they did it... four 25bps hikes this year likely appropriate but could go harder if inflation spikes. Could do 50bps in March... another mentioning this, flying the test flag for a potentially more hawkish start to this hiking cycle. Harker also said he expects a weak jobs report on Friday because of Omicron... indicative of the economy at full employment.

Neil Wilson is the Chief Market Analyst at markets.com