Today's Markets: European shares try to follow Asian bounce higher

The latest from world markets and in companies news

November 29, 2022

Equities regain some poise as China steps up vaccination calls
Hawkish Fed chatter hits US shares
Oil rebounds

China and its covid response are driving the headlines. The Hang Seng led a charge for Asian equities overnight, jumping 5 per cent after Chinese health officials encouraged the elderly to get vaccinated – no big changes but they cannot reverse it all at once; getting the elderly vaccinated is job one. Mainland shares +2-3 per cent. There is unease about supply chain implications from ongoing restrictions and rising cases; and concern about what protests against the government could mean for risk. But there is also a sense that the direction of travel can only be towards easing restrictions sometime in the New Year. When exactly that will be depends on many things, not least the pace of vaccinations, but it seems likely to regime will have to relent at some point.

Hawkish Fed comments didn’t help lift the mood yesterday on Wall Street. St Louis Fed president James Bullard, one of the most hawkish members of the FOMC, said markets were “under-pricing risk that the FOMC will have to be more aggressive rather than less aggressive in order to tame the substantial inflation in the US”. This chimes with my own view that inflation will be stickier and the Fed will need to keep going for longer than the market currently expects. NY Fed president John Williams stressed inflation was still too high and predicted unemployment could rise as high as 5 per cent next year, from 3.7 per cent last month. Given there are 11m jobs in the US, this implies a pretty seismic fallout in the jobs market that only higher for longer rate hikes could achieve, surely? All the major indices fell around 1.5 per cent on Monday, the Dow just reversing off the August swing high at 34,300.

Watching the MACD here on the S&P 500...

European stock markets followed mildly higher in early trading, the FTSE 100 rallying above 7,500 led by oil & gas, basic resources. Retail stocks also faring well following Black Friday and Cyber Monday. Are consumers wearing higher prices? In short yes. Look at the US retail sales figures showing them up almost 50 per cent in nominal terms since 2019.

Companies

Wood Group falls on strategy ‘refresh’, FX knock

Wood Group (WG.) said in a trading update on its capital markets day that it was a “new Wood” after shifting to less risky, reimbursable work. Major engineering firms have often been stung by lump-sum contracts where they bear the responsibility for cost overruns. Wood laid out a new set of medium-term forecasts, saying Ebitda margins would stay flat for some time before growing further out, it also said it would return to free cash flow from 2024.

For this year, the company stuck to its guidance of sales of $5.2bn-$5.5bn, and adjusted Ebitda of $370mn-$400mn. A negative foreign exchange shift would knock around $10mn off cash profits, the company said. Wood’s shares were down 12 per cent on the update. AH

Higher interest rates a challenge for 888

888 (888) pointed to “material external changes” that have impacted its business since its acquisition of the non-US assets of William Hill in July, with higher interest rates meaning bad news for its debt pile and the post-pandemic ecommerce slowdown leading to reduced growth in online markets.

But the online betting and gaming company also said ahead of its capital markets day event that it now expects better-than-expected cost synergies from the William Hill deal. Management will set out new financial goals for 2025, which include hitting £2bn in revenue, an adjusted cash profit margin higher than 23 per cent, and leverage of less than 3.5 times.

Peel Hunt analysts said that “we are confident of a typically punchy presentation today and eventual success”. 888 shares were flat in early trading. CA

Shell in major renewables deal

Shell (SHEL) has burnished its green credentials further through a deal to acquire Nature Energy for €1.9bn (£1.64bn). The Danish company is a producer of renewable natural gas (RNG) from agricultural, industrial, and household wastes. The deal not only brings Nature Energy’s feedstock supply and infrastructure under Shell’s control, but also around 30 new plant projects in Europe and North America, a third of which are in “medium to late development stage in Denmark, the Netherlands and France”. The production of biomethane, a chemical identical to conventional natural gas, will help Shell to fulfil its net-zero emissions and carbon intensity targets, but, more importantly, it provides Shell with an opportunity to build an RNG value chain at global scale, plus the fuel source is looked upon favourably by policymakers, both here in Europe and across the pond. MR

Elsewhere, FX is responding to the change in risk tone with the dollar easing back overnight and into the European open. GBPUSD rose above 1.2020 after touching 1.1940 yesterday evening. EURUSD trying to recover 1.04 but stumbling; USDJPY holding at 138.

Oil prices were higher with some speculation that OPEC might cut output again this week. The China story is a tricky one here too since greater mobility restrictions is short-term negative for crude pricing; yet if this spurs the regime into pushing for an earlier reopening it could be more positive looking further out down the futures curve, which is looking extremely flat right now with a very mild contango through to March before it flips back into backwardation... suggests real uncertainty about the longer-term but a slight bias towards prices pushing up over the coming months.

Crypto... in about the least surprising news since the FTX collapse BlockFi – which was bailed out in the summer by FTX - has filed for chapter 11 bankruptcy.

Today we hear from Bank of England governor Bailey, plus it’s US Consumer confidence data. After back-to-back gains the index pulled back sharply in October. Consumers’ expectations regarding the short-term outlook remained “dismal”, with the Present Situation index down to 138.9 from 150.2 in September; whilst the Expectations Index is still lingering below a reading of 80—a level associated with recession.

Neil Wilson is the Chief Market Analyst at Finalto