The FTSE 100 is trading marginally lower this morning after the benchmark posted a fresh 2016 high yesterday afternoon. Stocks around the globe have continued their impressive recent performance since the shock of the EU referendum, and this morning the German Dax joined the FTSE 100 and S&P500 in trading back above the levels seen pre-Brexit. Sterling is slightly lower against most its major crosses despite receiving a boost last night against the US dollar, as the Federal Reserve’s decision to leave interest rates unchanged saw some weakness in the buck.
Rolls-Royce (LON:RR) shares jump on 80% drop in profits
Despite the broader index trading pretty much flat, there’s been some significant moves in individual shares so far this morning, with manufacturing company Rolls-Royce leading the gainers and rallying more than 13%. The reason behind the surge in price seems odd on first viewing, with the company reporting an 80% drop in pre-tax profits this morning, but this is a classic example of low expectations being exceeded and causing a stock to rally. The company hasn’t benefitted from the declining pound as many of its peers on the index have, with the rapid depreciation instead weighing on the bottom line and causing a £2.2 bn hit to the hedging position in place to protect dollar-denominated sales. Today’s sharp increase in price has seen the share move back into the green for the year. The weakness in the US dollar following the Fed’s decision last night has boosted mining stocks in particular with Anglo American (LON:AAL), Randgold Resources (LON:RRS) and Fresnillo (LON:FRES) all enjoying strong up days.
Oil continues to sink lower
The price of oil dropped lower once more yesterday with Brent trading down to its lowest level in almost three months. The weakness in the US dollar was more than offset by a first increase in DOE inventories in 10 weeks, and when taken with the fourth consecutive rise in the Baker Hughes rig count seen last Friday, the fundamentals seem to be turning less supportive of price. This can be seen in the performance of Royal Dutch Shell (LON:RDSa) and BP (LON:BP), as both languish towards the bottom of index. Rather interestingly the three-month performance of both is far better than that of Brent, with Royal Dutch Shell up by around 15% and BP just over 13% higher for the period. Due to the contango nature of the market the decline in front month Brent is reduced, but even with this considered the benchmark has declined 7% in the past three months. The delayed reaction to the price of oil for both these firms suggests that traders believe the recent leg lower may prove transitory, meaning if it persists there could be substantial downside to come for both these stocks.