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Thursday, December 8, 2022

FTSE 100 Live 02 March: Oil price at 8-year high above $110 despite International Energy Agency release of supplies

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Pay fears hit Royal Mail shares

The dumping of Royal Mail shares continued today as investors took fright at the potential cost of inflation-linked pay rises for thousands of posties.

The FTSE 100-listed deliveries firm fell another 5%, taking losses since the summer to 40%, after a “sell” note from City firm Liberum highlighted the threat to margins ahead of annual pay negotiations with the Communication Workers Union (CWU).

About 67% of Royal Mail’s UK operating cost base is accounted for by people costs, which will take a significant hit if the union is successful this month in securing a pay deal near the current 7.8% rate of the retail price index.

Liberum analyst Gerald Khoo cut his earnings forecasts for 2023 and 2024 to reflect his concern that price increases or productivity improvements will not be enough to offset wage inflation.

He pointed out: “Historically, the best rates of productivity improvement achieved by the UK business have been 2-3% per annum. It has struggled to deliver that of late.”

Royal Mail shares fell 18.3p to 369.5p, which compares with Khoo’s new 350p target. The company was promoted to the FTSE 100 in June, but is now set to lose its place in the quarterly reshuffle based on Tuesday night’s closing prices.

Other big fallers in the top flight included bottling business Coca-Cola HBC, which continues to come under pressure due to its operations in Russia and Ukraine. Its shares fell 6% or 106p to 1666.5p, but the wider FTSE 100 rose 46.57 to 7379.82 due to higher prices boosting several commodity-based stocks including oil giant Shell.

The FTSE 250 index improved 163.55 points to 20,665.21, led by a rise of 7% for Weir Group following a reassuring set of annual results from the mining technology business.

With a record order book and its markets “buoyant”, Weir forecast strong growth in revenues and profits for this year. Much will depend on geopolitical events, but the Glasgow-based firm pointed out its assets in Ukraine and Russia accounted for 2% of the group.

On AIM, Vertu Motors rose 6% or 3.4p to 61p after the retailer produced the latest in a long line of earnings upgrades. It also announced a share buy-back programme worth £3 million.

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Commodity stocks boost FTSE 100

The FTSE 100 index has risen 0.8% to 7387, bucking the downward trend seen elsewhere in Europe.

The impact of rising commodity prices were a big factor in London’s resilience, with shares in Shell and Rio Tinto among 3% higher.

Russian precious metals miner Polymetal also recovered by 7% at one point after annual results included a dividend of 52 cents a share worth $246 million (£185 million) in total.

Persimmon shares were 5% higher after strong annual results and a 2% rise in sales rates in the opening weeks of 2022.

Plans by insurer Aviva to return £4.75 billion to shareholders contributed to a rise of 6.7p to 413.3p, but Royal Mail fell 2% after Liberum downgraded the stock to “sell”.

The FTSE 250 index rose 138 points to 20,638, with Lloyd’s of London insurer Hiscox up 7% after its annual results.

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House price average above £260,000

House prices show no signs of slowing after Nationwide reported a 1.7% month-on-month rise in February to take the UK average to over £260,000.

The annual increase accelerated to 12.6% from 11.2% in January, with the price now 20% or £44,138 higher than the month before the pandemic struck the UK.

The latest increase comes despite a significant weakening of consumer confidence caused by the squeeze on household incomes.

Nationwide chief economist Robert Gardner said mortgage approvals continued to be above pre-pandemic levels. He added: “A combination of robust demand and limited stock of homes on the market has kept upward pressure on prices.”

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Traders cool rate rise expectations

The Ukraine invasion and associated rise in oil prices is having a big impact on the outlook for US interest rates, which until very recently pointed towards several hikes this year.

Financial markets have now ruled out a half point increase at the Federal Reserve’s meeting this month, instead betting on a quarter point rise followed by fewer hikes in 2022.

The expected restraint from the Federal Reserve comes even though inflation pressures are mounting due to the latest hike in oil prices.

Deutsche Bank analyst Jim Reid said: “Central banks are going to have a real challenge on their hands as they seek to prevent supply-driven inflation becoming entrenched whilst also protecting growth.”

He said the cooling in rate rise expectations on both sides of the Atlantic had helped to cushion growth stocks and other risk-based assets from some of the volatility caused by the Ukraine invasion. That’s reflected in the 10-year US bond yield, which is at 1.71% today compared with more than 2% when rate rise expectations were at their height last month.

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Oil prices higher despite IEA release

Oil prices continue to rise after Brent crude futures this morning traded at almost $112 a barrel for the first time since June 2014.

The latest rise of 6% came despite the 31 members of the International Energy Agency (IEA) yesterday agreeing to release 60 million barrels of oil from emergency reserves.

IEA executive director Fatih Birol warned: “The situation in energy markets is very serious and demands our full attention.”

The plan aimed to send a “strong message” to global oil markets that there will be no shortfall in supplies as a result of Russia’s invasion of Ukraine.

However, oil markets responded by sending the Brent price 7% higher, with a further increase today amid fears about how sanctions might impact the flow of Russian exports.

OPEC+ is meeting today but ministers are not expected to divert from their existing plans for a monthly increase in supplies of 400,000 barrels a day.

Asia stocks fell on Wednesday, with Japan’s Nikkei 225 down 1.5% after European markets traded sharply lower on fears about how soaring oil prices will impact the global economy.

The FTSE 100 index fell more than 120 points yesterday but is expected to open 26 points higher at 7353 this morning. Trading at the Moscow stock exchange remains suspended.

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