Slide in energy prices and yields helps to lift the FTSE 100

Europe

European markets have enjoyed a modest rebound in the wake of a strong session in Asia markets, as yields give back some of the gains seen so far this week, in a continuation of the seesaw, yields up, stocks down, yields down, stocks up narrative, that has characterised this week’s trading activity.

The FTSE 100 is managing to outperform despite the sharp fall in oil prices which is dragging on BP and Shell but helping consumer discretionary with airlines enjoying a solid session, led by the likes of easyJet, Wizz Air and British Airways owner IAG.

The pullback in yields from yesterday’s highs could also be a consequence of the sharp fall we’ve seen in energy prices, and the worst one-day fall in oil prices since September last year, which took them back to levels last seen at the end of August and wiped out all of September’s gains in the space of 4-days.

Imperial Brands saw a sharp fall to 18-month lows yesterday after the announcement that the UK will raise the legal smoking age over time, as well as announcing the prospect of restrictions on the purchase of vaping products to children. Today’s latest trading update has seen the shares rebound after the NGP side of the business saw strong revenue growth and that current trading was in line with its full year guidance. The company also announced it is increasing its share buyback program to £1.1bn.  

Tesco shares have continued to push higher on the back of yesterday’s strong H1 numbers.

National Grid also issued an update ahead of its H1 numbers saying that the business is trading in line with expectations.

French train manufacturer Alstom has seen its shares plunge to 18-year lows after reporting that delays on trains that are expected to be delivered for the London Overground and the Elizabeth Line prompted it to downgrade its cash flow expectations. The company now says it expects to see €750m in negative cash flow for the current fiscal year, as it continues to wade through the integration process of its takeover of Bombardier 3 years ago. The main impact has been due to higher inventory levels

Metro Bank appears to have become a byword for controversy over the last few years, with the rot setting in when the bank announced in 2019 announced it had misstated the value of its loan book which meant it needed to raise £350m of extra capital at a significant cost of 9.5%, to shore up its balance sheet in 2020. There were also questions around corporate governance with the bank under investigation by regulators for handling money from Iran and Cuba, both countries who are under EU and US sanctions. When new CEO Dan Frumkin came in, he inherited a bank that had a huge trust and competence deficit to overcome, and while revenues have risen in the period since then, there’s been little evidence that the bank would be able to turn a profit.  

Fast forward to today and having navigated that pothole in 2020, the bank is back in talks with a view to raising another £600m from investors, £250m in equity and another £350m in debt, sending the shares down to a new record low.

US

Despite the more positive tone in European markets, US stocks opened lower after weekly jobless claims came in line with expectations at 207k, while continuing claims remained close to 9-month lows at 1,664k in a further sign that the US labour market remains resilient, ahead of tomorrow’s key payrolls report for September. There was some surprise that recent strikes in the auto sector didn’t show up in the numbers.

Rivian shares have taken a nosedive after reporting preliminary Q3 sales of between $1.29bn and $1.33bn. The electric car company also said it planned to issue up to $1.5bn in green convertible notes as it looks to raise extra cash.

Corona beer maker Constellation Brands has seen its shares slide despite beating forecasts on its Q2 numbers, with beer sales beating expectations at $2.39bn, while net sales rose 6.9% rising to $2.84bn. The company also raised its full year guidance on profits to between $12 to $12.20, making today’s weakness all the more puzzling. There was some underperformance when it comes to wines and spirits sales which fell short, while operating income fell 19% to $80.7m.      

Amazon and Microsoft shares are in focus after the UK’s CMA launched an investigation over concerns the two companies are abusing their power and creating a duopoly.   

FX

The US dollar looks set for another modest decline, as yields ease further in the leadup to tomorrow’s non-farm payrolls report.

After this week’s volatility in USD/JPY there appears to be some reluctance to push for a move back towards 150.00 with markets none the wiser as to whether the Bank of Japan intervened in the market earlier this week. Based on recent central bank flow data, it would appear that the BOJ didn’t step into the market in the physical sense, however intervention can take many forms, including picking up the phone, and simply checking levels which by itself can have the same effect, and spooking the market lower.

To use a metaphor, just because the Bank of Japan didn’t fire the gun, doesn’t mean it’s not prepared to fire it if the need arises.   

Commodities

Crude oil prices saw one of its biggest one-day plunges this year yesterday after US gasoline demand plunged in September, fuelling concerns that the recent surge in prices prompted demand destruction. Gasoline inventories rose by 6.5m barrels well above forecasts of a 200k increase. This was always the risk given the sharp increase in prices seen since June, and as such could see further weakness in the coming days back towards $80 a barrel.

Gold prices are continuing to languish close to 7-month lows, currently trying to move beyond the highs of the last 3-days ahead of tomorrow’s US payrolls report.  

Volatility

UK retail giant Tesco saw elevated levels of price action on Wednesday following the release of earnings news. The initial reaction was far from positive but with early losses being recovered through the session, this proved to be one of the most active equities. One day vol stood at 55.77% against 28.1% for the month.

The Reserve Bank of New Zealand elected to leave its monetary policy unchanged yesterday as had been widely expected. There was a brief sell off for NZD/USD, but the downside here proved short lived. One day vol on the pair came in at 14.78% against 10.12% for the month.

RBOB Gasoline prices slumped on Wednesday off the back of the release of the latest inventory data. A very modest increase in reserves had been expected, but the build was meaningfully higher and stockpiles now sit at their highest levels in almost two years. One day vol on gasoline printed 45.24% against 30.82% for the month.

And the Nikkei index hit its lowest levels since May during Wednesday’s trade, before staging a reversion. US Treasury yields finally backing away from those recent highs was seen as being a key driver here, with the index trading in a range of around 1% driving one day vol to 25.4% against 15.98% for the month.