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Unilever And Lloyds Underpin The Ftse100

Published 23/02/2017, 05:15
Updated 03/08/2021, 16:15

Europe

While we’ve seen another 22 month high for the German DAX today as it hit 12,000 for the first time since April 2015, progress in European markets has been somewhat cautious to say the least.

Other markets in Europe have seriously underperformed with southern European markets getting hosed off to the tune of triple digit losses. Even the CAC40 has struggled to maintain a positive bias not unsurprisingly due to the ongoing uncertainty surrounding the upcoming French Presidential election.

This risk aversion has fuelled further gains in German 2 year bund prices which are continuing to push ever higher into nose bleed territory.

The second chapter of this week’s UK banking story has been a much more positive one than yesterday’s offering by HSBC which saw sharp share price falls, as Lloyds Banking Group (LON:LLOY) outlined its latest full year numbers.

Whoever said low risk equates to low profitability obviously didn’t have Lloyds Banking Group in mind as the banks recovery story continued today as it reported pre-tax profits of £4.2bn, its best numbers in ten years.

In a sign that the bank is slowly consigning its legacy issues to the dustbin of history the bank’s provision for PPI was down to £1bn for 2016, and though there are some concerns that the recent scandal around HBOS may mean further provisions get set aside, there is optimism that shareholders can now focus on the future as opposed to dwelling on the past.

Concerns about the UK economy given the Brexit vote are likely to loom large in the next year or so which means that the slightly higher provision for bad loans might be a signpost to a wider concern.

Despite the recent cut in interest rates by the Bank of England the bank was able to improve its net interest margin to 2.71% up from 2.63% a year ago, proving that the effects of the recent August rate cut were quickly absorbed and discounted by the market. The bank also declared a special dividend of 0.5p as well as a final dividend of 1.7p.

Also doing well house builder Barratt Developments (LON:BDEV) is higher after posting yet another decent post Brexit trading update. Profits rose 8.8% to £321m in the six months to the end of 2016, and though London completions were down the picture outside of London is much more positive, with a strong order book.

Unilever (LON:ULVR) shares are also enjoying a decent day after the company announced a wide scale review of its operations in the wake of the recent Kraft Heinz takeover bid. While Kraft Heinz won’t be able to come back to the table for at least six months after this week’s events, it seems clear that Unilever management are looking at the potential to extract extra value, while at the same time abiding by the “sustainable living” that is at the core of its corporate culture.

Whether that means dispensing with some of their underperforming brands, accelerating their “Connected for Growth” restructuring plans, or raising prices on some of their more popular products, we could well see some brands end up on the cutting room floor when the company updates shareholders in April.

On the downside mining and basic resource stocks have slipped back led by Anglo American (LON:AAL) and BHP Billiton (LON:BLT), while InterContinental Hotels Group has also slid back after a broker downgrade note from Barclays (LON:BARC).

US

US markets opened a touch lower after yesterday’s new record highs as markets adopted a modestly defensive posture ahead of the release of the latest FOMC minutes, with energy stocks in particular slipping back.

On the earnings front it would appear that the US consumer still appears happy to pay up in the consumer discretionary sector after theme park operator Six Flags reported strong attendance numbers for its latest quarter, despite profits coming in slightly lower than expected on better revenues.

FX

The euro has continued to come under pressure today despite a continued improvement in the latest economic data. French political risk continues to widen the differential between French bonds and German bond markets with the 2 year German bund hitting new all-time highs with record negative yields of -0.91%. These are eye wateringly ridiculous levels at a time when German inflation is just below 2%, which means investors appear happy to give away almost 3% in real terms to guard against redenomination risk.

The pound has had a mixed day after UK Q4 GDP showed a slight improvement to 0.7% on the quarter. There was good and disappointing in the report, which showed business investment was down, however net trade saw a big improvement with exports rising 4.1% as the lower pound boosted the UK’s competitiveness in overseas markets.

Commodities

Crude oil prices have slipped back from their recent range highs as the trading range of the last few months remains intact. While OPEC seems confident that member countries will continue to stick to their production quotas, the offset continues to be the amount of inventory that US producers continue to build. With OPEC reluctant to extend the quotas beyond the June meeting it is becoming increasingly obvious that in spite of rising demand, the rise in inventories will ensure that the supply overhang is likely to last a lot longer.

Gold prices have held their ground despite the expectation that this evenings Fed minutes are likely to be on the hawkish side. It is not immediately obvious what they can add to the overall narrative given recent hawkish comments from a number of Fed policymakers which have been made in the period since the Fed meeting took place.

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