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London Quick Take - 5 Things to Know in Markets Today - 29 Oct
5 Things to Know in Markets Today
1.Shares higher ahead of ECB, US data
European shares traded higher on Thursday ahead of some key US economic data and the European Central Bank decision. The ECB is expected to hold rates at 2.50%, while the market is pricing in an 82% chance of a hike in December. The focus is on president Christine Lagarde's tone on France's fiscal crisis and energy-driven inflation. Although inflation remains the ECB's biggest risk, financial conditions have tightened somewhat, in part to the turmoil in French OATs. Moreover, whilst energy inflation remains high there are as yet limited signs of this spilling over into broader inflationary pressures. The key thing to look out for will be any signs from Christine Lagarde that the ECB is worried about French debt spillovers and the central bank's willingness to close spreads. Any nod to using the transmission protection instrument (TPI), the ECB's as-yet unused tool to contain any dislocation in sovereign bond markets, would put a ceiling on OAT yields. However, the ECB is likely not keen to be seen to bail out France for fiscal profligacy; doing so could just make matters worse as incentivising still further unchecked borrowing and spending. EURUSD currently sits at 1.1130, close to the 18-month lows at 1.1110.
The FTSE 100 added around half a percent as heavyweight Shell led gains, whilst the DAX rose +0.8% and the CAC was up around 0.9%. It follows another decent but unspectacular session on Wall Street as risk sentiment firmed up. The Nasdaq-100 rallied to close slap bang on its 50-day moving average at 29,813, but a major pullback in Alphabet after-hours has sent futures tumbling more than 1% this morning. The S&P 500 and Nasdaq Composite each closed up +0.3% higher, while the Dow Jones added +0.2%. Brent oil trades -1% lower today below $114 as VP JD Vance's diplomatic outreach to Iran raised hopes of avoiding renewed US military strikes, though dwindling stockpiles and a complex wartime shipping system adds to upside risks.
The FTSE 100 added around half a percent as heavyweight Shell led gains, whilst the DAX rose +0.8% and the CAC was up around 0.9%. It follows another decent but unspectacular session on Wall Street as risk sentiment firmed up. The Nasdaq-100 rallied to close slap bang on its 50-day moving average at 29,813, but a major pullback in Alphabet after-hours has sent futures tumbling more than 1% this morning. The S&P 500 and Nasdaq Composite each closed up +0.3% higher, while the Dow Jones added +0.2%. Brent oil trades -1% lower today below $114 as VP JD Vance's diplomatic outreach to Iran raised hopes of avoiding renewed US military strikes, though dwindling stockpiles and a complex wartime shipping system adds to upside risks.
2.Shell tops forecasts, Lloyds down despite profit jump
Shell rallied 3% to the top of the FTSE after doubling its quarterly profit year-on-year to $10.81 billion and posted record refining margins. Adjusted earnings, its preferred measure of net profit, rose from $5.43bn a year ago on higher commodity prices and the pressure on refined products. Refining margins are insanely good at $42 per barrel, vs the previous record of $28 in Q2 2022. Profits were also the best since that quarter.
Lloyds shares fell more than 3% despite posting a surge in Q3 profits as the absence of impairment charges boosted the bottom line. The reaction implies investors are worried about the tax increases in the Budget and requiring a higher bar for earnings. Profits doubled to £2.3bn in the third quarter while revenues jumped to £5.1bn from £4.6bn. Q3 net interest income rose 10% and the bank reiterated full-year guidance. Higher bar now though after bank surcharge rose from 3% to 6% - some relief yesterday in the share price but today's big earnings jump is not enough.
Pass the painkillers: Haleon shares tumbled 12% on soft cold and flu demand. Low volume growth of just +0.5% on weak North America sales hurt organic revenues, which rose 2.6% for the maker of Panadol and Sensodyne. Some changes to import classifications in China also dented sales. The downbeat quarter means management now expect full-year organic revenues to grow 2.5%, down from a prior range of 3-5%.
Lloyds shares fell more than 3% despite posting a surge in Q3 profits as the absence of impairment charges boosted the bottom line. The reaction implies investors are worried about the tax increases in the Budget and requiring a higher bar for earnings. Profits doubled to £2.3bn in the third quarter while revenues jumped to £5.1bn from £4.6bn. Q3 net interest income rose 10% and the bank reiterated full-year guidance. Higher bar now though after bank surcharge rose from 3% to 6% - some relief yesterday in the share price but today's big earnings jump is not enough.
Pass the painkillers: Haleon shares tumbled 12% on soft cold and flu demand. Low volume growth of just +0.5% on weak North America sales hurt organic revenues, which rose 2.6% for the maker of Panadol and Sensodyne. Some changes to import classifications in China also dented sales. The downbeat quarter means management now expect full-year organic revenues to grow 2.5%, down from a prior range of 3-5%.
3.Alphabet plunges, Microsoft delivers
Alphabet shares plunged 10% in after-hours trading as it disappointed investors with its Q3 report card, with a $51bn outlay for AI spending sending its free cash flow deeper into the red. Free cash tumbled to negative $9.1bn, widening from the negative $5.9bn in the second quarter, only the second time since going public it's had a negative cash flow read. A $5.2bn EU fine made this looks worse than it is. Capex could reach as high as $205bn this year, which implies a monster sequential Q4 rise to $73bn.The capex/free cash spread is less of an issue than the fact the AI mode is hurting its traditional search business. Core search advertising revenues rose 12% to $63.4bn but missed estimates and was down from 20% growth a year ago. The worry is that its AI is cannibalising the business that funds it. On the other hand, sales at the cloud business doubled to $30.7bn.
Investors are clearly rewarding companies that can continue to maintain positive free cash flow despite spending billions on capoex. Microsoft shares rose about 4% in the after-hours market as it reported $18.6bn in free cash despite capex rising to $45.2bn as growth in its Azure cloud continued to surprise to the upside.
Elsewhere, cybersecurity firm Fortinet plunged 25% despite raising guidance for a third straight quarter as investors fretted over the timing of service revenues. Total billings +29% year-over-year to $2.34bn, total revenue +20% to $2.08bn, product revenue +37% to $765 million, but service revenue growth of 13% was a disappointment. The numbers are weighing on CrowdStrike and Palo Alto.
Marvell Technology was down 10% on reports it's in talks to acquire Lumentum, a deal between two Nvidia-backed AI names that would create a $300bn company. The news propelled Lumentum shares more than +5% higher in the pre-market.
Meanwhile Samsung Electronics' semiconductor unit Q3 operating profit surged 15-fold to KRW106.5tn, missing KRW108.5tn consensus; group net income KRW75.21tn, tempering AI infrastructure enthusiasm. A 15-fold increase doesn't cut it now.
Investors are clearly rewarding companies that can continue to maintain positive free cash flow despite spending billions on capoex. Microsoft shares rose about 4% in the after-hours market as it reported $18.6bn in free cash despite capex rising to $45.2bn as growth in its Azure cloud continued to surprise to the upside.
Elsewhere, cybersecurity firm Fortinet plunged 25% despite raising guidance for a third straight quarter as investors fretted over the timing of service revenues. Total billings +29% year-over-year to $2.34bn, total revenue +20% to $2.08bn, product revenue +37% to $765 million, but service revenue growth of 13% was a disappointment. The numbers are weighing on CrowdStrike and Palo Alto.
Marvell Technology was down 10% on reports it's in talks to acquire Lumentum, a deal between two Nvidia-backed AI names that would create a $300bn company. The news propelled Lumentum shares more than +5% higher in the pre-market.
Meanwhile Samsung Electronics' semiconductor unit Q3 operating profit surged 15-fold to KRW106.5tn, missing KRW108.5tn consensus; group net income KRW75.21tn, tempering AI infrastructure enthusiasm. A 15-fold increase doesn't cut it now.
4.Fed sticks
The Federal Reserve left interest rates on hold and gave the market little else but to assume that a December rate hike is coming, albeit there was a slightly dovish read across from chair Kevin Warsh signalling that the initial September rate hike is functioning as intended. The Fed upgraded its assessment of economic growth from "solid" to "strong", while two policymakers dissented in favour of an immediate rate hike. The only major surprise was Warsh's announcement that one of the eight policy meetings next year would not include a vote on setting rates. In 2028 two of the eight meetings will not be considered 'live'.
Today sees the advance Q3 GDP estimates and the Core PCE Price Index, the Fed's preferred inflation gauge. The Atlanta Fed's GDPNow model currently points to 3.3% annualised Q3 growth, helped by a surge in AI-related business investment, with equipment spending running nearly 18% higher. PCE is seen running at a rounded +0.3% month-on-month – above the Waller Line and indicative of the Fed needing to hike in December.
Today sees the advance Q3 GDP estimates and the Core PCE Price Index, the Fed's preferred inflation gauge. The Atlanta Fed's GDPNow model currently points to 3.3% annualised Q3 growth, helped by a surge in AI-related business investment, with equipment spending running nearly 18% higher. PCE is seen running at a rounded +0.3% month-on-month – above the Waller Line and indicative of the Fed needing to hike in December.
5.Budget reaction
Gilt yields are lower, with the 10yr down ~3bps to 5.30% this morning while sterling is just clinging to $1.33 on a slightly weaker USD. The FTSE 100 ended the day up +0.1% on Wednesday as banks and bookies profited from lower-than-expected sector tax hikes. Housebuilders & Rightmove took a kicking as the details around the Your First Home scheme disappointed investors – a lack of detail on timings, funding and duration suggested it could be a bit punier than hoped for, with the outlined £4.7bn government-backed lending for the scheme only a fifth of what Help to Buy delivered and indicative of perhaps only two years for the programme to run initially.
Bookmakers rallied as the machine gaming duty hike from 20% to 25% was less than had been feared by investors. The resulting bid for bookmakers' shares sent Entain +5.6% and Rank +11.7%.
There was also relief for banks. Bank surcharge from 3% to 6% was better than expected by the banks. Most exposed to the bank surcharge - Lloyds, NatWest, Shawbrook and Barclays rallied but were off the session highs by the end of the day.
Defence got some positive noises with the chancellor plugging the £4.7bn funding gap in the existing DIP, and talking up the 3% NATO target, albeit kicking the can down the road to next year's spending review. Rolls-Royce rose 1.7% but BAE Systems was down on the day, while Babcock, Chemring and Qinetiq all rose. This morning we are seeing some positive read-through from the Budget details with BAE Systems +2.2%, Cohort +3.8%, and Chemring, Qinetiq and Babcock all more than one percent higher.
Bookmakers rallied as the machine gaming duty hike from 20% to 25% was less than had been feared by investors. The resulting bid for bookmakers' shares sent Entain +5.6% and Rank +11.7%.
There was also relief for banks. Bank surcharge from 3% to 6% was better than expected by the banks. Most exposed to the bank surcharge - Lloyds, NatWest, Shawbrook and Barclays rallied but were off the session highs by the end of the day.
Defence got some positive noises with the chancellor plugging the £4.7bn funding gap in the existing DIP, and talking up the 3% NATO target, albeit kicking the can down the road to next year's spending review. Rolls-Royce rose 1.7% but BAE Systems was down on the day, while Babcock, Chemring and Qinetiq all rose. This morning we are seeing some positive read-through from the Budget details with BAE Systems +2.2%, Cohort +3.8%, and Chemring, Qinetiq and Babcock all more than one percent higher.