European markets have struggled for gains today after an initially positive start, with the FTSE100 in particular having a bad time of it, with big declines in the share prices of Centrica (LON:CNA) and BAE Systems (LON:BAES), while Barclays (LON:BARC) shares also gave up their early gains, after rising sharply in early trade.
There doesn’t appear to have been one particular catalyst, however weak manufacturing reports from Japan, France and Germany suggest that the global manufacturing sector is heading towards a possible recession. A raft of corporate earnings have also been disappointing which hasn’t helped.
Barclays latest full year numbers were a little bit of a mixed bag, with more positives and negatives, but were nonetheless still a reminder that investment banking in Europe remains challenging.
Earlier this week Barclays management had to contend with the news that Tiger Global, one of its major shareholders had sold down its $1bn stake in the bank, in what could hardly be called a resounding vote of confidence in the direction of the bank. Senior management have already come under pressure to sell off the underperforming investment banking division by another activist shareholder, Edward Bramson, and the departure of Tiger Global could well see Bramson step up these calls, particularly since the investment bank has once again underperformed.
The first half of the year came up short largely due to a GBP1.4bn fine to US regulators which helped pull profits down to GBP1.6bn in H1, however Q3 profits came in at GBP1.5bn up GBP400m from the year before.
Without the various fines, profits could have been expected to come in well above GBP5bn, after the improvement seen in Q3 raised optimism that we might see a catch up in Q4. This optimism proved to be well founded and this morning’s full year numbers show that profit before tax, excluding litigation and conduct rose 20% to GBP5.7bn, however once all of these had been stripped out net profit came in at GBP1.4bn, still an improvement on the GBP1.9bn loss last year.
The bank also set aside GBP150m in respect of Brexit risks, while the performance of the investment banking division is unlikely to assuage management concerns that they are likely to come under pressure to make further efficiencies there.
Equities was the only division to improve on revenues, with FICC, corporate lending and banking fees all showing declines from their performance in 2017.While this is a little disappointing it compares favourably with a lot of its European peers whose investment banking divisions have struggled much more in recent months. There’s something to be said for a low bar, however the early gains proved to be somewhat short-lived despite management saying that they planned to supplement dividends with additional cash returns in the months ahead.
British Gas owner Centrica’s numbers were also disappointing coming in below expectations, with management blaming a challenging external backdrop, with the new energy price cap prompting an exodus in consumer accounts.
While revenues increased by 6% to GBP29.7bn, operating profit fell short of forecasts at GBP1.39bn. The company is also being hurt by increased maintenance costs on its UK nuclear reactors.
In an attempt to free up extra cash the company announced they would be looking to sell their US franchise home maintenance business Clockwork for $300m.
UK defence contractor BAE Systems results were also received negatively, despite a big jump in its order book. Revenues were down from 2017 to GBP16.8bn, even if operating profits improved slightly to GBP1.6bn.
Cashflow saw a big decline, almost halving from last year, which has raised some concerns, though management have guided that this is only temporary.
The company was positive about the outlook despite challenges around the German arms export ban to Saudi Arabia, and this caution has seen the shares fall sharply.
US markets opened lower this morning, despite initially looking as if they might open higher on optimism over China, US trade. It would appear that concern over weaker than expected US durable goods numbers for December, and a weak Philadelphia Fed survey for February, is prompting concerns that the weakness that we’ve been seeing in global manufacturing appears to be now manifesting itself in the latest US manufacturing numbers.
Another area of concern is the US housing market with existing home sales hitting a three year low in January.
Stocks in focus are likely to include the Cheesecake Factory after their latest numbers showed that quarterly profits for Q4 came up short by $0.02c a share. Revenues also came in light, despite higher sales which suggests that lower pricing is impacting on revenues and profits.
Domino’s Pizza (NYSE:DPZ) latest numbers also feel shy of estimates on profits and revenues, though as in the case of The Cheesecake Factory(NASDAQ:CAKE) (NASDAQ:CAKE), comparable store sales were also higher.
The pound showed little reaction to the latest UK public sector borrowing numbers which posted a record budget surplus number for January, pushing government borrowing to its lowest level in 17 years.
With Brexit looming next month this unexpected improvement means the public finances have much more headroom in the event of any Brexit related disruption, and also give the Chancellor a little more fiscal space in the Spring statement, also due next month.
The Australian dollar has been the worst performer after Dalian, one of China’s major ports banned the import of Australian coal.
The US dollar has remained fairly steady, despite yields edging slightly higher in the wake of last nights Fed minutes. While the minutes were on the dovish side there was no indication that the Fed might be looking to cut rates, and it was clear that US officials were still reasonably confident about the state of the US economy.
Crude oil prices have drifted off their highs today on increasing evidence of weakness across global manufacturing, though rising expectations of inventory overhangs will start disappearing could well support the downside in the short term.
A slightly firmer US dollar has seen gold prices slip back from their highest levels in ten months, while palladium prices have also slipped back after falling short of the $1,500 mark. Demand for palladium still looks strong despite today’s pullback given that tighter emissions standards are likely to keep a floor under prices.
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