Our head of investment rounds up the morning's big news.
Following a drop on Wall Street, European markets have opened lower, although the FTSE 100 is nursing more modest declines partly thanks to a boost from Shell (LSE:SHEL) and Next (LSE:NXT) which are among just a handful of gainers on the index following their positive first quarter updates.
As expected, the Federal Reserve raised interest rates by another 25-basis points last night, lifting the benchmark overnight lending rate to a range of 5-5.25%. Looking ahead Fed Chair Jay Powell suggested the central bank is approaching the peak of the tightening cycle, commenting ‘we’re close, or maybe even there’. US interest rates now stand at a 16-year high after the Fed raised rates ten times in the last year and two months.
While inflation in the United States has been coming down with CPI at 5% in the latest data for March, falling for nine consecutive months, it is still significantly above the Fed’s 2% target. Although some have started to question whether this target is somewhat arbitrary.
In a mega week for central banks following the RBA and the Fed, next up is the European Central Bank (ECB) today which is expected to lift interest rates for a seventh consecutive time. The ECB is likely to slow its pace of tightening with a 25-basis point increase at lunchtime after three 50-basis point moves, although the door remains ajar for a more hawkish hike.
US mid-sized lender PacWest Bancorp (NASDAQ:PACW) confirmed this morning it has been approached by partners and investors and is considering selling strategic assets, after shares plunged more than 50% after-hours following media reports of a potential sale or fundraising. However, PacWest sought to reassure investors by saying it had not suffered out-of-the-ordinary deposit outflows, unlike rival First Republic Bank which saw depositors withdraw $100 billion.
Less than two months ago, PatWest received a $1.4 billion cash injection from Atlas SP Partners following the collapse of SVB, which sparked negative reverberations across the sector.
Earlier this week, First Republic Bank was rescued by JPMorgan Chase & Co (NYSE:JPM), with the Wall Street lender’s CEO Jamie Dimon commenting that ‘there may be another smaller one’ ahead, referring to a risk of another potential banking collapse.
PacWest is the latest lender to fall victim to the turmoil in the US mid-cap banking sector with worried investors either cutting their holdings or adding to short positions, which has punished its share price. PacWest has a heavy focus on commercial real estate lending, which has suffered on the back of the Fed’s aggressive rate hiking path after the longstanding punchbowl of cheap money was removed.
The stock has tumbled from a 52-week high of $34.68 to a low of $6.42 at yesterday’s close, even before it more than halved again in the post market session to $3.05 last night.
Shell reported first-quarter adjusted earnings of $9.65 billion, beating analysts’ expectations for $8.14 billion and higher than its profit in Q1 2022 of $9.13 billion when Russia first invaded Ukraine. The oil giant kept its share buyback programme unchanged at $4 billion over the next three months.
Strong trading amid the volatile price environment in Europe and America helped Shell’s earnings, outpacing analysts’ expectations and offset the impact of weaker oil and gas prices and lower refining margins. Its chemicals result also improved driven by better margins thanks to lower utility and feedstock costs.
Unlike BP (LSE:BP.), Shell maintained its share buyback programme, returning further cash to shareholders. Over the past year though, shares in Shell are up around 7.5%, underperforming BP which is up nearly 18%.
Sky high profits for Shell and BP have raised questions about whether oil giants, which benefitted from last year’s commodity boom following the onset of war in Ukraine, should be paying more windfall taxes to redistribute excess profits towards essential government services. The counter argument is that these profits may not endure, particularly as underlying oil prices weaken amid slowing global demand. During Covid for example, oil prices fell sharply, resulting in an annual loss for Shell in 2020 of almost $20 billion.
Vodafone Group (LSE:VOD) and CK Hutchison’s Three UK are likely to agree on a £15 billion tie-up this month, according to the Financial Times, valuing the equity of the combined group at £9 billion with £6 billion of debt.
Talks are understood to have been ongoing for around a year as Vodafone looks to save costs amid weakness in one of its key markets, Germany, pressure on its share price and the sluggish macroeconomic backdrop.
The FTSE 100 telecoms giant has also been dealing with C-suite uncertainty following the departure of CEO Nick Read. The appointment of his replacement Margherita Della Valle, who was previously Vodafone’s finance chief potentially paves the way for this deal to make progress.
However, the merger could face a number of regulatory hurdles amid concerns from the competition regulator that consolidation could result in increased tariff prices and reduced consumer choice.
Shares in CK Hutchison rallied overnight in Hong Kong to reach the highest level since July 2022 lifting the Hang Seng Composite Industry Telecoms index while Vodafone is trading modestly lower in London.
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