It’s been a nervous start to the new month for markets in Europe with decent gains for financials after HSBC drew down the curtain on a positive H1 for the UK banking sector, as a whole, against a backdrop of concerns in its core Asia markets.
Europe
Away from those positives, European markets have fallen back from their intraday highs on reports that US House Speaker Nancy Pelosi would be landing in Taiwan tomorrow evening in defiance of Chinese warnings not to do so.
This raising of tensions presents a bit of a problem for the US, especially given Russia’s aggressive behaviour in Ukraine. It will be enormously difficult for the US not to proceed with this visit, despite Chinese displeasure, as to not do so would send the wrong message and give China encouragement to push its luck further out when it comes to its military activities in the Asia region.
Today’s H1 numbers, from the UK’s largest bank appear to show a business which is performing well, shrugging off concerns over the health of the Chinese economy, helping to push the shares to their highest levels since late June, and up over 20% year to date.
Despite concerns at the end of Q1 that the weaker economic outlook would weigh on its performance in Q2, today’s results have seen the bank return a much stronger set of numbers. Q2 reported profits before tax rose to $5.8bn, helped by a $1.8bn deferred tax gain and an increase of $500m in impairment charges to $1.1bn for the first half.
Consequently, this has seen H1 reported profits after tax rise to $9.2bn, while reported revenues for the same period slipped slightly to $25.2bn.
The Asia business, as expected, returned the bulk of the bank’s profits in H1, with $6.3bn, despite the disruption caused by Covid restrictions in the greater China region. The UK operation also performed well with a 15% rise in profits to $2.5bn. The bank cited the impact of higher interest rates as it improved net interest margin to 1.35%, up from 1.2% a year ago.
On the wider numbers it was interesting to note that net loans and advances to customers fell from the same period a year ago to £1.03bn, not altogether surprising perhaps that its biggest market has been hit by covid restrictions for most of this year.
In terms of the outlook the bank raised its guidance for net interest income for this year, and that it expected to return to paying quarterly dividends in 2023 with the intention of improving the payout ratio of 50% in 2023 and 2024. This appears to be in response to criticism from shareholders like Ping An who were unhappy about the bank’s decision to suspend the dividend in 2020 due to the pandemic. Management has continued to push back on the calls by Ping An to break up the business.
Pearson shares have jumped to the top of the FTSE100 after reporting a bigger than expected rise in H1 sales and profits. H1 sales rose by 12% to £1.79bn, helping to boost adjusted operating profits by 26% to £160m. A lot of the improvement appears to have come from a jump in revenues in its assessments and qualifications, as well as English language learning, which both saw in excess of 20% increases during H1. The improvement in English language learning helped drive losses down to £4m, from £13m during the same period a year ago.
U.S.
US markets opened lower on reports that House speaker Nancy Pelosi is expected to land in Taiwan tomorrow night, in defiance of warnings from China not to interfere in what they see as internal domestic politics.
In M&A news Pepsico announced that it was taking an $8.5% stake in fitness energy drinks maker Celsius Holdings in a deal worth $550m at a price of $75 a share.
On the earnings front we have Microsoft acquisition Activision Blizzard reporting their latest Q2 numbers. Since Microsoft took the decision to pay $68.7bn for the business it’s been notable that revenues in this sector have slowed from their pandemic peaks. This isn’t altogether surprising given that people can now go out and about but there’s so far been precious little sign that this slowdown is abating. In Q1 revenues came in well below last year’s numbers of $2.28bn at $1.77bn, while profits also fell short of expectations at $0.64c a share. The number of hours users spent playing Call of Duty declined and this could well be another area that could start to feel the cost-of-living squeeze in the months ahead. Q2 profits are expected to come in at $0.48c a share.
We’ve also got Q2 numbers from Pinterest against a backdrop of weakening advertising demand with revenues expected to come in at $663.2m and profits of $0.18c a share.
Boeing shares have also edged higher after averting a strike at its St. Louis plant and also getting approval from US regulators in its attempts to resume deliveries on its 787 Dreamliner’s.
FX
It’s been another day of US dollar weakness, which is helping to deliver a wider bid to other asset classes. The weaker tone has primarily been driven by expectations that the US Federal Reserve may well be closer to the end of its rate hiking cycle than the beginning. The latest ISM manufacturing numbers also prompted some further weakness as prices paid dropped sharply to 60, the biggest one month drop since 2010, adding to the markets belief that inflation pressures are diminishing.
Somewhat perversely despite evidence that appears to show the Chinese economy is struggling to rebound the Australian dollar is enjoying a strong day, however that may have more to do with the fact that the RBA is expected to raise rates tomorrow by 50bps or more, as it seeks to play catchup after being caught out by this year’s surge in inflation.
The Japanese yen continues to push higher as the divergence between US and Japanese yields continues to narrow, as well as getting a bit of a haven bid on the rise in geopolitical tensions between the US and China.
Commodities
After a sharp rise in prices last week, ahead of this week’s OPEC+ meeting, oil prices have fallen sharply. Today’s falls appear to have come about as a result of concerns over weakening demand. The initial catalyst was a slide in Chinese manufacturing PMIs into contraction territory in July, while bigger than expected falls in the latest European numbers has compounded those concerns, as well as falling prices.
Copper prices have also come under pressure over similar concerns.
Volatility
The USD/JPY trade proved to be something of an outlier ahead of the weekend break with downside momentum accelerating in the wake of those more dovish than expected comments from the Fed. The true stand out here however is the fact we’re seen price action spike again on what would historically be considered one of the most liquid of pairs, as the underlying heads back to levels not seen in almost two months. Daily vol came in at 16.15% against 9.66% on the month.
Cocoa prices are looking choppy as the US cash contract eyes a move towards 12-month lows. There’s no constraint on supply here and recession fears have the potential to reign in demand. A weakening US dollar may have the ability to lend some support, but these downside pressures were sufficient to drive vol on US Cocoa to 45.71% on Friday, up from the monthly reading of 36%.
A number of US green energy stocks surged ahead of the weekend break off the back of news that plans for federal support in the sector were being progressed. The inflationary impact of soaring fuel costs is seen as being key in helping any legislation like this get passed by lawmakers. CMC’s basket of renewable energy companies finished last week at highs not seen since November, with daily vol standing at 73% against a one month print of 68%.
Source: HSBC Lifts the FTSE100 as August Gets Off to a Cautious Start, US Dollar Slips.
