China leaps, BP shares drag FTSE higher

Elmer FUD

Bye, bye Rabbit; hello Dragon? Elmer FUD is here, and for traders that spells ‘Fear, Uncertainty and Doubt’. It’s been 12 months to forget for China – they’ll be pleased to see the back of the year of the rabbit; the dragon may be more auspicious.

A huge rebound in China seems to be giving risk some lustre this morning – Shanghai rallied 3%, Hong Kong 4% and Shenzhen 6% as Beijing upped the ante on its efforts to stabilise the market ahead of the Lunar New Year holiday.

Authorities are stepping in after a wave of selling sent shares in mainland China to multi-year lows. There is a genuine sense of concern but not panic – the situation is desperate, but not yet serious.

Moves to curtail short selling may be enough, the market has already suffered a sharp repricing and trades at about 8x forward earnings, the lowest valuation in a decade. I would usually question whether short-selling bans really work – they are apt to disappoint and tend to produce the opposite effect of what is desired. But they can help stem some immediate bloodletting and the view seems to be that Beijing is serious about doing whatever it can.

A silver lining for China – reports SMIC is on the brink of producing next-gen chips despite US export bans...the kind of thing that throws into sharper focus the implications of Trump’s vow to slap more tariffs on China should he win this November.

Rally the Troops

UK oil giant BP led the FTSE 100 to a gain of almost one per cent in early trade on Tuesday before the index pared gains somewhat as the company posted profits ahead of expectations. BP shares rallied 6% and added a cool 20pts to the blue chips, which again tested the resistance area around 7,700.

The DAX index was flat at 16,900 as industrial production orders for Germany unexpectedly rose, which has seen the euro come a bit off yesterday’s almost two-month low.

Sterling also rose a bit after touching its weakest since the Fed’s December meeting at 1.25188, with the dollar generally rallying on Monday after the ISM services data, which pointed to inflation pressures lasting and sent Treasury yields higher.

That combo naturally left gold lower, whilst crude oil rallied a bit after yesterday hitting a three-week low after declining about a tenth in a week.

Smooth Sailing for BP

BP reported net profits of almost $3bn in the fourth quarter, ahead of the $2.6bn expected, whilst also raising the dividend 10% and increasing the pace of buybacks. For the full year underlying replacement cost profit of $13.8 billion for 2023, which though a sharp fall from the record $27.7bn a year before is still its second-best earnings scorecard in more than a decade.

The commitment to buybacks was more than the market expected and shows confidence. The Shell earnings report also proved stronger than expected, with the UK oil giant raising its dividend and increasing buybacks. So not all is lost for oil majors – the reopening of the global economy is complete, so shares are back to where they were before the pandemic, whilst the realpolitik of energy policy is helping them to escape the doldrums.

Walking a Tightrope

Bond yields rose as the US services PMI pointed to inflation pressures persisting for longer. Prices accelerated at the fastest clip in a year, with the prices paid index surprising by a fair amount at 64 vs 56.7 in Dec.

The Fed is treading a very fine line here as it dares not risk letting inflation demons lose again after working so assiduously to rein them in. It would seem profligate to cut rates too soon against this backdrop, particularly after monster jobs and GDP reports.

RBA Caution

The Reserve Bank of Australia left rates on hold and sounded cautious about cutting too soon, noting in the statement that “while recent data indicate that inflation is easing, it remains high [...] The Board needs to be confident that inflation is moving sustainably towards the target range”.

Governor Bullock added: “We haven't ruled anything out and we haven't ruled anything in [...] the optionality here really needs to be maintained because we need to be driven by the data”.

The Australian dollar rallied a bit, but with little punch against the firm USD.