China sinks its teeth into the oil market, as Lagarde is not for tapering
Financial markets were a sea of red on Thursday on the back of an ECB meeting, which essentially introduced a small step into the tapering universe, and news late in the day that China will sell some of its state oil reserves as a way to stem commodity price inflation. This sent the price of Brent crude oil futures tumbling by more than 2%, so far prices have stabilised at just below $68 per barrel, but all eyes will be on the commodity markets on Friday as the markets digest news that the Chinese government is willing to get its hands dirty in yet another sector of the Asian powerhouse’s economy.
The curse of September markets
Overall, September can be a tricky month historically for financial markets, and this is already being felt. There is a definite sense that the sands are shifting, and uncertainty is rising. Investors are trying to discern what will happen with the Delta variant and how that will impact the economic recovery in the coming months. We are also waiting patiently for the all-important Federal Reserve meeting that takes place in two weeks’ time. The FTSE 100 is clinging onto the 7,000 handle after falling more than 1% on Thursday, although the real pain was felt by EasyJet in the FTSE 250, which fell more than 10%, we will discuss the significance of this move below. Interestingly, the FTSE 100 suffered the biggest decline in the major European markets on Thursday, however the FTSE 250, which is more domestically focussed, shed a mere 0.2% on the day. The FTSE 100 has had a torrid month as global growth prospects are re-evaluated on the back of Covid. However, the UK’s domestic economy, although there are headwinds coming, remains in good shape. Thus, the recent outperformance of the FTSE 250 is a sign that the market sees supply-chain delays, rising prices and a tight labour market as fuelling a temporary growth slowdown in the UK, however the longer-term growth story remains positive. This could explain the relative strength of the pound in recent weeks, even as fears about the UK economic outlook have risen.
ECB’s a lady not for tapering, yet
The ECB meeting was the main highlight of Thursday, especially when ECB President Christine Lagarde, after announcing a small slowdown in bond purchases, adopted a famous phrase from Margaret Thatcher and said, “this lady is not for tapering.” The ECB upgraded both growth and inflation forecasts, and Lagarde and co. on the governing council were unusually upbeat about the current state of the Eurozone’s economy and its prospects. However, although the decision to taper asset purchases was unanimous across the governing council, they were still at pains to state that this is not the start of tapering. We think that this is the first meaningful step towards tapering its emergency Covid bond-buying programme. However, the ECB managed to pull off a wonderful trick by disconnecting bond purchases from interest rate increases. It said that rates essentially will not rise over the forecast period (until 2023), because it currently expects inflation to remain below its 2% target in 2023. Eurozone inflation for 2-years’ down the line was actually revised lower on Thursday to 1.5% and this had a bigger impact on financial markets than the taper news.
Bond markets stay loyal to the ECB
The market reaction was not focussed on today’s news about a small reduction in monthly bond purchases since the annual stock of bonds purchased by the ECB won’t change and the emergency bond buying scheme is set to end next year anyway. Instead, it focussed on the fact that interest rates are unlikely to rise anytime soon, and this is why we saw German and Italian 10-year bond yields fall sharply during afternoon trading on Thursday. In the FX market, the euro was unscathed from the ECB meeting and rose slightly on the day. The FX market is being driven by the dollar right now, so the euro moved slightly higher on the day along with other G7 dollar crosses. Overall, the FX space could be quiet for the next two weeks, until we get the next Federal Reserve meeting. The big change that could dramatically impact European markets would be any tweak to the ECB’s APP programme, its long running QE programme. However, while that could start to slow down in the coming 12 months, especially as the Eurozone economy stages an impressive recovery, we think that the ECB is less likely to be focussed on that aspect of policy yet, although it may start to be discussed in the December meeting and beyond which could liven up the euro upside.
UK corporates in focus as takeovers loom
Elsewhere, the focus was on two major British companies today, EasyJet and Morrison’s. They are both in contention for takeovers, and EasyJet announced that it had rejected an unsolicited bid earlier on Thursday. The bid is suspected to be from Whizz air, the ultra-low cost Eastern European airline that’s share price has outperformed its rivals during the pandemic and is desperate to move into more routes in Western Europe. While there are some obvious synergies, ultimately the short haul aviation sector needs fewer planes in the sky, and this deal would not deliver that. EasyJet rejected the offer and then announced that it was completing a $1.2bn rights issue, which will shore up its balance sheet but will dilute current shareholders’ stakes. This news was not welcomed by the market, and EasyJet declined more than 10% on Thursday. The large decline in EasyJet’s share price shows that it costs to reject bids, the good news for any bargain hunters is that EasyJet did not rule out another potential offer for the business, thus if Whizz Air or another airline raises a higher bid then the EasyJet board could definitely be for turning.
Woes for Morrison’s but its stock price could hold up well ahead of auction
Lastly, Morrison’s announced pretty dire financial results for the first half of this year and blamed the “biblical costs” associated with the pandemic for pushing up its cost base and eating away at profits. It also said that it the delivery driver shortage will push prices up for consumers, which will leave the BOE with a headache. The stock price outperformed the rest of the FTSE 100, but it still fell 0.3% on Thursday. Morrison’s stock price has held up fairly well this year, but the past month has been tough. We expect Morrison’s and its peers in the supermarket sector to remain under pressure for as long as the supply chain crisis threatens profits in the grocery sector. However, Morrison’s is expected to be auctioned next month, so we could see some unexpected volatility ahead of this key event for the company.