Must read: FTSE 100, US jobs report, UK house prices, Shell, Tesla

Big news out of the US later has the potential to move global stock markets. Our head of investment explains why and discusses the day's other hot topics.

GLOBAL MARKETS 

European markets have flat to slightly higher with the FTSE 100 outperforming as BP (LSE:BP.) and Shell (LSE:SHEL) trade near the top of the UK index. German factory orders posted the biggest monthly drop since October 2021, missing analysts’ expectations on the back of growing macroeconomic pressures. 

Wall Street closed lower on Thursday ahead of the closely watched US non-farm payrolls report due Friday lunchtime. The ADP private employment report this week topped estimates in December, potentially paving the way for a better-than-expected jobs report later today. It is a case of good news is bad news for the markets in the sense that any signs of strength in the labour market could bolster inflation expectations, prompting the need for a more hawkish policy response from the US Federal Reserve.

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The US economy is expected to have added 200,000 jobs in December, slowing from 263,000 in November with the unemployment rate seen remaining at a 50-year low of 3.7%.

UK HALIFAX HOUSE PRICE INDEX  

British house prices fell by 1.5% in December month-on-month according to the latest Halifax house price index. This was the fourth consecutive monthly decline, but an improvement on November’s 2.4% shrinkage. Year-on-year annual house price growth slowed to the lowest level since October 2019 at 2%, more than halving versus November growth of 4.6%. All nations and regions suffered an annual growth rate slowdown in the final month of 2022. The average UK property price now stands at £281,272 down from £285,425 last month, with Halifax forecasting an 8% drop in house prices over the year. 

Although house prices remain historically elevated, 11% higher than at the start of 2021, as the UK heads towards a recession, house prices are expected to soften further. The housing market looks set to struggle under the weight of rising mortgage rates and broader inflationary pressures such as the high cost of energy and food which are squeezing the consumer and weighing on housing demand.

• UK housing most unaffordable since Victorian times

Many individuals and households are holding off from purchasing properties on the back of slimmed down budgets, and in the hope that mortgage rates and property prices become more affordable down the line. Offsetting an even steeper slide in the UK property market is the chronic shortage of houses and the macroeconomic backdrop of build cost inflation.

UK housebuilders like Persimmon (LSE:PSN) and Barratt Developments (LSE:BDEV) have had a very tough year in terms of share price performance, down over 50% and 40% respectively.

SHELL 

Shell said it expects to pay around $2 billion in windfall taxes related to the UK Energy Profits Levy and additional taxes in the EU. But this will not have an impact on fourth quarter adjusted earnings given the expected timing of payments. 

In its latest earnings release in October, the energy giant reported its second highest quarterly profit ever of $9.5 billion, more than doubling year-on-year, and said it expected to start paying windfall taxes in early 2023. In the Autumn Statement chancellor Jeremy Hunt raised the UK Energy Profits Levy from 25% to 35% from January 2023 and extended it to finish in March 2028 from the end of 2025. 

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BP and Shell achieved sky-high profits in 2022 as the war in Ukraine sent oil and gas prices sharply higher, boosting their earnings, which prompted the UK government to increase its windfall levy. However, Shell warned in November that it will be evaluating its plans to invest £25 billion in Britain over the next 10 years as a result, suggesting that Shell could invest less in UK energy. Three quarters of this decade-long investment plan was set aside for the green transformation, intended for low and zero-carbon products and services. 

Brent crude spiked to a 13-year high above $130 a barrel in March 2022 following Russia’s invasion of Ukraine, but since the peak, oil prices have been under pressure with the global benchmark now back below $80 a barrel weighed down by a softening demand outlook and China’s covid lockdowns. 

Shell will release its fourth quarter results on Thursday 2 February.

TESLA 

Tesla Inc (NASDAQ:TSLA) is cutting prices in China, Japan, and South Korea in an attempt to bolster demand amid the softening consumer outlook. This is the second time in three months that the electric vehicle giant has reduced prices in China for the Model 3 and Model Y cars after December deliveries hit a five-month low. In December, a Reuters report suggested that Tesla was planning to cut production at its Shanghai plant this month. 

After its meteoric surge during the pandemic, shares in Tesla have plunged by around 70% over the last year, with the stock trading lower in Frankfurt today. It has borne the brunt of a wider sell-off in the technology sector as investors shift away from growth stocks amid the rising inflation and interest rate environment. Tesla has also been grappling with increased competition from rivals like NIO Inc ADR (NYSE:NIO) in China as well as the slowing global economic backdrop which is likely to weigh on the overall auto market.

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Investors are also concerned that Elon Musk has taken his eye off the ball, given the recent distraction around his Twitter takeover. The fact that Musk has been selling billions of dollars of Telsa shares certainly hasn’t helped investor confidence either. 

This is a stock that tends to provoke strong opinions, with a band of loyal bullish followers against another group with a diametrically opposed bearish view. Wall Street analysts are mixed on the stock, with 25 buy recommendations versus 13 holds and 4 sells. But there have been a number of price target downgrades lately on the stock from the analyst community including from JP Morgan, Deutsche Bank, RBC, and Mizuho, suggesting it could be a bumpy road ahead.