Markets today: BP earnings jump as European stocks drift
- BP profits $8.5 billion in Q2
- Australia continues its aggressive tightening policy
- News from Purplebricks and JD Sport
European stock markets ended lower on Monday after trading higher for much of the session and are still somewhat weaker this morning, although the FTSE rose slightly with help from the oil majors. US equity markets fell slightly during yesterday’s session without providing much of a boost to investors after July’s strong rally. This morning, the highlight for the London market are very strong results for BP, as expected. Underlying replacement cost profit was $8.5 billion in the second quarter, compared with $6.2 billion in the prior quarter. Good refining and oil trading margins generating strong underlying cash growth. Or you could just say that oil and gas prices are so high it’s like printing money. The quarterly dividend has been increased by 10% – the usual suspects will complain. BP said the windfall tax introduced last month on profits through the end of 2025 will result in a one-time deferred tax charge of $0.8 billion – a drop in the ocean compared to numbers today, it seems. Oil prices stabilized this morning after a sharp decline yesterday down from the bearish flag/falling wedge formation.
The S&P 500 played perfectly at an old technical level, pulling back from the horizontal resistance of 4,145 formed by the June 21 and March 22 lows. We constantly wonder – when is the bottom here? I tend to believe that this is only in the midst of a strong bear market rally; the 9% rally in the broader US market in July is just a knee-jerk reaction to oversold conditions, degraded valuations, earnings strength and hopes that the Fed is about to move to a more accommodating position. Most notably, the 10-year Treasury yield has crashed 100 basis points since the S&P 500 low in mid-June. This provided strong multiple expansion for tech stocks in particular, which had been heavily offloaded due to Fed tightening and inflation concerns in the first half of the year. Caterpillar (CAT), Starbucks (SBUX), Airbnb (ABNB) and Uber (UBER) report income later.
I am not convinced that the bottom has been reached, although there could still be more near-term strength towards the 4,200 level. JPM notes: “During the 5 major bear markets (ie say over 40% declines) in the S&P500 since 1929, we have seen an average of 5 “bear market rallies” with an average return of 18% over a 2-month period. “For context, since the mid-June lows, the S&P has gained about 13%.
There is a lot of concern over Nancy Pelosi’s supposed visit to Taiwan. Asian markets fell around 1-2% overnight. It’s really quite difficult to read too much into this visit that the Speaker of the House of Representatives evoked – the war of words between the United States and China is likely to be spicy but unlikely to be material. Longer term, we just don’t know how Beijing will react; for today, it’s a case of muscle flexing: buzzing the skies with jets, military drills, and even firing odd missiles. Ultimately, the worry is that tensions will become inflamed enough for Beijing to use this as a pretext it seeks to invade? I’m no expert on Asian politics, so I’ll leave that to those in the know; for traders, I would advise you to just play what is in front of you.
While manufacturing PMIs in Europe and Asia were weak, the US ISM figure was a bit better than expected. A key driver of the weak reading was a very sharp decline in the prices paid element – a win for the Fed. Wells Fargo: “The prices paid component of the ISM unexpectedly slowed to 60.0. For policymakers tasked with slowing the economy just enough to control prices, but not enough to cause a recession, this drop 18.5 points in price paid is a welcome development.”
Remember that the M&A arbitrage trade ding-dong over Twitter (TWTR)? David Einhorn’s Greenlight Capital took a position on Twitter at an average price of $37.24. As I said in May, the r/r could favor the conclusion of a deal by hook or by crook. Einhorn wrote, “At this price, there is a $17 per share upside if TWTR prevails in court and we believe there is approximately $17 per share downside, if the deal breaks down. So we’re getting 50-50 odds on something that should happen 95+ percent of the time.”
Elsewhere, the Reserve Bank of Australia continued aggressive central bank tightening, raising rates by 50 basis points and saying it “expects further action…but is not on a trajectory.” predefined”. The AUDUSD fell 1% during the session to hit a low of 0.6933, with the slight shift in the guidance forecast pointing to a potential slowdown in the pace of RBA tightening.
The Japanese yen hit a two-month high against the dollar as the yield chart continues to shift. Yields on the 10-year US Treasury fell to just over 2.5% this morning from around 3.5% in mid-June. This has just wiped out much of the differential yield premium that pushed the dollar to a two-decade high against the yen last month; short yen unfolding to take profits in this case, it seems.
Key level for the greenback: The US dollar is a little firmer as the tone of risk aversion narrowly prevails. DXY recovered 105.40 after touching the 50-day SMA around 104.90, where the 38.2% and trend support lines come into play.
Neil Wilson is the Chief Market Analyst at markets.com