European markets edge higher, HSBC and energy drag on the FTSE100

We’ve seen a positive start to the week for markets in Europe despite Israel taking early steps to push into Gaza. The limited and incremental nature of the incursions thus far appears to be helping assuage concerns that the escalations might prompt another front opening on Israel’s northern border with Lebanon and Hezbollah.

Europe

A slide in gold and crude oil prices also feeds into this dialling down of some of the concern that we saw at the end of last week. Nonetheless the gains feel somewhat fragile with the DAX struggling to hang onto its gains after the German economy slipped into contraction in Q3 and prices in October slipped into deflation on a month-on-month basis, and year on year slowed from 4.3% to 3%.

The main drags on the FTSE100 have been energy due to the slide in oil prices, although we could be seeing some profit taking on BP and Shell ahead of their Q3 numbers later this week. We are also seeing the banks continuing to struggle on the back of concern over weakening net interest margins, and a difficult economic outlook.

Today was the turn of HSBC who also saw a slowdown in NIM while reporting Q3 profits before tax of $7.7bn, a sizeable increase on the same period a year ago, however those numbers last year were depressed by $2.3bn impairment related to the sale of its French operations.

The profits compared to the previous quarter were $1.1bn lower, and also missed expectations, while revenue increased to $16.2bn. NIM came in at 1.7%, down slightly from Q2, but 19bps higher from the same period a year ago.

Impairments or ECL’s rose by $1.1bn during the quarter, with $500m of that related to the Chinese property sector, with HSBC claiming that the problems here are near a bottom, although any recovery could well take a while. There was a big drop in net loans and customers of $23.8bn, while the balances in customer accounts fell by $32.6bn over the quarter, and were also lower than the same period last year.

The UK bank performed well with $1.78bn in profits, up from $1.66bn in Q2, as the integration of SVB UK continues apace.

In Q2 HSBC said it expected to see annual net interest income of $35bn, and appears to be on course for that, with year-to-date NII of $27.5bn.

The bank also announced a $3bn share buyback, bringing total buybacks year to date to $7bn as well as announcing a dividend of 10c a share, however this hasn’t been enough to prevent the shares slide towards their September lows.

NatWest has also continued to slide after being downgraded by SocGen while Jefferies slashed its outlook as well as its price target to 170p from 350p.

Digital education publisher Pearson shares are higher after announcing an upgrade to its full year profit guidance today, saying it expected to see adjusted operating profit to come in between £570m and £575m, an increase of £20m.

Sports Direct owner Frasers Group is higher after announcing it has agreed a deal to sell the IP and trademarks of “Missguided” to SHEIN.

Airtel Africa is the best performer after reporting a 2.3% rise in H1 revenues to $2.62bn, as well as slipping to a loss after tax of -$13m, which was driven by the Q2 devaluation of the Nigerian naira in June.

ASOS is also higher on reports over the weekend that it is looking to offload Top Shop.

US

US markets have taken their cues from today’s better tone in European markets opening higher, rebounding from 5-month lows, as investors look to draw a line under two successive weekly declines.

Broadcom and VMWare shares are in focus after announcing that they would be delaying the completion of their $70bn merger which had been due to conclude today.

On the earnings front McDonalds has seen Q3 revenues come in at $6.69bn with the US business outperforming with an 8.1% rise in like for like sales. Profits also beat forecasts coming in at 3.19c a share, with the company announcing a 10% increase in its quarterly dividend to $1.67.

Apple shares are higher ahead of the unveiling of their new Macs as well and ahead of their quarterly numbers later this week.  

Tesla shares, on the other hand, continue to look vulnerable having broken below their longer-term uptrend mid-October, they then slipped below their 200-day SMA last week, and have slipped to their lowest levels since 1st June today, below $200.

FX

The Australian dollar is the best performer after September retail sales rose 0.9%, comfortably beating expectations of 0.3% while the August numbers were revised higher from 0.2% to 0.3%, prompting some short-covering ahead of next week’s RBA rate meeting. This unexpected resilience appears to be prompting some repricing in the prospect of a rate hike next week.

The Japanese yen has edged up to a 2-week high against the US dollar on reports that the Bank of Japan could adjust its YCC framework tomorrow morning, allowing JGB 10-year yields to move through 1%.  

Commodities

Gold prices have slipped below $2,000 an ounce, down from Friday’s 5-month highs.

Crude oil prices have slipped back below $90 a barrel, down from their Friday peaks as the Israeli incursion into Gaza turns out to be a more measured affair than many had initially feared it might have been. Despite the increase in the geopolitical temperature over the past few weeks oil prices have shown little sign of getting close to their September peaks, as concerns about weak demand outweigh concerns over supply disruption and the spreading of the conflict beyond the current protagonists.

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