- Market tug-of-war between inflation and rising interest versus reporting of positive company profits
- China-US tensions over Taiwan shrugged off
- Emerging markets may face pressure over strong US dollar
- Hedge funds have been caught-out this year, with poor performance
- Oil price is reducing and there are reasons why this may continue
- Naughty supermarkets have not been passing on lower oil prices at the pumps
- Big oil has certainly benefitted
Broadly in markets, we’re seeing well-known concerns over inflation being counter-balanced by some surprisingly positive company profits.
Economies are grappling with inflation and reports aren’t easing concerns around this – we heard from a UK based Think Tank, The Resolution Foundation, which said inflation could touch 15% next year due to soaring gas prices, which, of course, are being stoked by Russia on account of Western sanctions levied its way due to its horrifying aggression in Ukraine.
Yesterday, the Bank of England announced a 0.5% hike to 1.75% as it steps up its attack on inflation.
A slight maybe overly optimistic view that is emerging is that a sharp economic contraction may cool inflation quite quickly and enable central banks to become accommodative again i.e. stop interest rate rises or even reduce rates.
As a counter-weight to the inflation picture, markets have had some positive trading days following reporting of better-than-expected company profits, both in the US and Europe.
In the US we’ve seen a little bit of a recovery in the tech sector driven in part by very good earnings from Paypal. The tech-heavy NASDAQ stock market rose to its highest point in three months yesterday.
This follows the US’s worst first half performance in over 50 years, and I will explain that through the lens of a famous hedge fund in a second.
A visit to Taiwan by Nancy Pelosi, the democratic Speaker of the House of Representatives and third in-line to the US presidency, has sparked tensions with China, who have started live fire military drills.
Interestingly, US and Asian markets seemed to shrug off the tension. Participants perhaps see that both the US and China have too much to lose in a war over Taiwan, especially considering the high costs being incurred by Russia for its illegal war.
Another consideration at the moment, with US interest rates rising so quickly, is that it is strengthening the US dollar. Why is this a concern? Because it is the globe’s most used currency – a hard currency as economists call it – and this may create issues for emerging market economies.
A strong dollar can quell global trade, which tends to be the mainstay of smaller EM economies, and it can also put them under pressure if their governments have a lot of debt – government bonds – that they’ve issued in US dollars, which is common. In addition, it will export inflation to emerging markets, which in turn must raise rates and choke their own economic activity.
One to watch.
Perhaps a little cost of living relief for those hamstrung at the pumps – the price of oil has been weakening recently and it may stay this way.
One of the driving forces behind price inflation has been rising energy prices including oil. The black gold is produced all over the world, but the big producers, responsible for around 50% of global production and around 90% of proven reserves, are organised under the OPEC cartel – the organisation for petroleum exporting countries.
Founded in the 1960s – it includes producers Iran, Iraq, Kuwait, Venezuela, and others, but importantly Russia, as well as Saudi Arabia who heads the group. OPEC members will get together and agree production targets as a way of regulating the flow of oil onto global markets, but also, more cynically, to avoid competition and keep prices high to maximise the significant profits they reap for their nation states.
Back to the oil prices – Brent crude has been levelling off and dropping from around $124 in March to closer to $100 / barrel, just before OPEC members met yesterday.
There’s been a fair bit of oil diplomacy in the run up to the meeting as Presidents Biden and Macron have lobbied Saudi Arabia to increase production and take a bit of the sting out of the rising costs affecting us all.
A small production increase was agreed, which might have disappointed leaders a little bit, but the price has now fallen to below $100.
What seems to be taking hold is that the risk that sharp interest rate rises may induce sharp economic recessions and hollow out demand is concerning traders more than constraints in supply.
Expect volatility in the oil market as the forces play out.
Hargreaves Lansdown have been mentioning some seemingly naughty supermarkets, as well as discussing a host of other companies.
They’re been accused of failing to pass falling wholesale energy prices onto customers, stalling the speed at which people can benefit from the tempering of the oil price.
Tesco, Asda, Morrisons and Sainsbury’s have been accused of dropping their petrol prices by less than half the amount that wholesale prices have declined. As the cost-of-living crisis continues to clamp down on people’s incomes, this sort of headline is something these companies don’t need.
Many have tried to align themselves as companies willing to help ordinary people who are struggling, by adjusting grocery pricing and quantities to ease the consumer crisis. Many will therefore be asking how the narrative can look so different at the pumps.
It seems what is happening at a business level is that supermarkets were hampered during the pandemic when petrol prices famously dropped to under one pound, so these groups are arguably making up for these previous shortcomings.
Go downstream in the oil production process and we find oil majors that dig the stuff out of the ground.
Given where oil prices have been in Q2, one may wonder how this translates to profits at the big oil super-majors. Well, BP gave us a little glimpse into their fortunes, and bumper profits were reported, as expected.
Second quarter profits rose to $8.5bn, up from $6.2bn in Q1.
Given how juicy, they have enabled the group to pay down debts by several billion as well as announce $3.5bn in share buybacks.
When companies have a windfall of profits like the oil majors are receiving right now, they have a few ways of giving money back to shareholders – they can pay it out as a special dividend, or they can repurchase shares from the market which reduces the amount in circulation, increasing the profit per share and therefore the share price and benefitting current shareholders.
BP have also announced a 10% increase in its quarterly dividend too and said it would continue increases into 2025 if oil remains above $60 a barrel.
Aside from dolling out goodies to shareholders, the group is also investing in both its hydrocarbon operations, somewhat contentious, but also in renewables – including wind farms just offshore from the Netherlands and hydrogen projects in Australia, Iberia and the UK.
Also feeling the cost pressure from inflation, we heard from Greggs this week too – or, if you’re into hilarious social media clips, GR-Eggs according to one American tourist.
Sales are booming, up 27% versus last year, but rising costs have kept profits flat as the group’s margins were squeezed.
The insurance group reported a slump in profits this week, with the half-year results having halved from a year ago.
They’re saying car repair costs and the cost of personal injury claims have been rocketing, with everything from spare parts to body shop labour costs all rising faster than the group had expected.
Direct Line say they have now repriced their policies to restore the expected rate of profit to normal levels.
A bit more misery for those who have booked flights with the nation’s flag carrier British Airways – it is extending the suspending of short-haul flights from Heathrow, which follows the airport’s controversial cap on passenger numbers.
Customers are no doubt at a point where they care very little about the ongoing spat between Heathrow and the airlines and instead just want a solution and their long-awaited getaways.
Looking at BA from a shareholder’s point of view, this disruption doesn’t spell good news for parent company IAG’s cash profile.
Paring down the flight schedule makes it harder to pay the very high level of non-flexible costs airlines have.
As a long-haul specialist, BA’s path to recovery is more protracted than short-haulers too, so this added obstacle is magnified.