FTSE sees a bounce despite Chinese fears

Our equities writer rounds up the most notable action on another volatile day in the markets.

IAG (LSE:IAG) and Rolls-Royce (LSE:RR.) were among London's most-traded stocks today as the FTSE 100 index rebounded strongly during the latest wild ride for heavyweight miners including Rio Tinto (LSE:RIO).

The top flight recovered more than 1% or 80.19 points to 6,984.10, having fallen by as much as 2% at one point on Monday due to contagion fears fuelled by a potential collapse of debt-laden Chinese property developer Evergrande (SEHK:3333).

A strong close on Wall Street helped confidence return, but the reprieve may only be temporary as Evergrande faces a debt repayment deadline on Thursday and there's the possibility the Bank of England or US Federal Reserve may signal tighter monetary policy later this week.

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For now, many investors are likely to be relieved at the return of volatility after a summer of solid, if largely unspectacular, trading.

Miners, in particular, are seeing some big price swings after the price of iron ore halved in just over eight weeks as China threatened a strict cap on the country's steel production rate in an effort to control economic activity.

Liberum sees the Evergrande credit crisis as another bear factor for iron ore prices, given that property accounts for around 10% of China's GDP and is a key driver of regional growth.

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The broker warns there's further downside risk as it highlighted “sell” recommendations on Rio Tinto and BHP (LSE:BHP) in favour of buying shares in Ferrexpo (LSE:FXPO), with a target price of 550p.

Rio shares still rose 2% and BHP improved 3% during today's market rebound, but with the latter some 20% lower than when it unveiled a record dividend of $10 billion alongside August's annual results. Shareholders should receive that £1.44 a share payment in their accounts today.

The biggest gain of the FTSE 100 session came from Pershing Square Holdings (LSE:PSH), which rose almost 6% after Universal Music (EURONEXT:UMG), in which the company has a 10% stake, was valued at 33.4 billion euros (£28.6 billion) ahead of today's stock market debut in Amsterdam.

British Airways owner International Consolidated Airlines Group also continued its two-day ascent after the White House said yesterday that UK and European passengers who have been double vaccinated will soon be able to travel to the country.

Hopes of a transatlantic travel boom sent shares up 11% yesterday and by 3% today, although at 171p they are still only back to levels seen in early August. The strong appetite for the pandemic-hit shares was shown in the fact that volumes were only beaten by Lloyds Banking Group (LSE:LLOY), which is often London's most-traded stock.

Rolls-Royce, which needs a sharp resumption of activity to boost engine flying hours, was the third most-traded stock as shares rallied another 2% or 2.8p to 118.5p.

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The prospect of additional shareholder distributions from Royal Dutch Shell (LSE:RDSB) meant the oil giant's B shares rallied almost 5% or 65.6p to 1,496.2p.

The momentum follows last night's agreement to sell its Texas-based assets in the Permian basin to ConocoPhillips (NYSE:COP) for $9.5 billion, marking the latest stage in the company's clean energy transition.

UBS is forecasting a share buyback of $7 billion (£5.1 billion), which would represent about 9% of the company's market capitalisation and come on top of $6.5 billion (£4.75 billion) from the underlying distribution policy. The bank's analysts have a price target of 1,860p.

Other risers in today's broad-based rally included Prudential (LSE:PRU), although the 2% improvement only went part-way to recouping the 8% slide seen on Monday after its £2 billion fundraising in Hong Kong was overshadowed by the China-led sell-off.

Inflation fears and the tapering of economic stimulus are likely to mean more market volatility in the weeks ahead, particularly with the second quarter likely to have seen the peak in the earnings recovery.

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Around 85% of companies in the S&P 500 Index and 65% in the Euro Stoxx 600 Index beat earnings expectations in the second quarter — well above historical averages. 

Nigel Bolton, co-chief investment officer of BlackRock’s Fundamental Equity Group, says this increase in earnings expectations means equities are cheaper now than they were at the start of the year.

This is the case on both a price-to-earnings basis and according to the “equity risk premium,” which measures the earnings yield of equities versus government bonds, where yields are around all-time lows. 

In his fourth quarter outlook, Bolton wrote: “Equities are not overpriced - strong corporate earnings combined with ultra low bond yields suggest this.

“But with the end of the synchronised Covid-relief surge since November, to pick winners investors must now be more discerning and select companies that can beat earnings expectations.”