BP earnings miss the mark, as the risk rally continues

The global risk rally has progressed into a new week. Asian equities have had a strong run, the Hang Seng is up by more than 4% in a week, the Nikkei is higher by 3% in USD terms. European stocks are lagging their US counterparts, possibly due to the May Day Bank Holidays, but also because the Magnificent 7 US tech stocks are roaring back to life.

As you can see below, the Magnificent 7 are leading the European Granolas (top European pharma, tech, and multinational stocks), and have pulled away in recent days. This is another sign that the AI boom is back. The S&P 500 equal weighted index is also lagging the S&P 500 market-cap weighted index, which also suggests that the risk-on tone to markets triggered by a less hawkish Fed and weaker than expected US payrolls is benefiting the largest US companies.

Chart 1: Magnificent 7 vs. the Granolas, normalized to show how they move together

Source: XTB and Bloomberg

The FTSE 100 is leading the pack in Europe this morning, as it plays catch up after the bank holiday at the start of the week. Nearly all stocks in the index are higher, with 94 risers and only 6 decliners. The FTSE 100 is one of the top performers in Europe, with 77% of stocks above their 50-day moving average, which can be a near-term bullish signal, only Spain’s Ibex index has a higher number of stocks above their 50-day moving average, at 80%.

BP still lags Shell

The market has had a muted response to BP’s earnings for Q1. Underlying replacement cost profits were $2.7bn, which is down from $2.9bn in the previous quarter and lower than the $4.93bn recorded in Q1 2023. However, the company maintained the pace of their share buyback programme at $3.5bn. There were some weak spots in this report: operating cash flow was at its lowest level since Q4 2020, and net debt has also ballooned to $24.01bn, up from $20.9bn in the prior quarter. The company pledged more cost savings in the next two years and announced changes to its organizational structure.  

A higher-than-expected tax rate cancelled out some positive FX effects. Oil and gas trading had a ‘strong’ performance, according to BP, after a rally in the oil price for Q1. BP is the last of the oil majors to report results. It placed in the middle of its peers for Q1, while Shell and Chevron did well, however, Exxon Mobil reported weaker than expected results for the quarter. These results suggest that the valuation gap between BP and Shell will persist, even after another solid performance for BP.

Chart 2: Shell vs. BP

Source: XTB and Bloomberg

Flutter Entertainment and Intercontinental Hotels are the top performers in the FTSE 100 on Tuesday, the latter embarked on a share buyback this morning.

Soggy April hits retail sales

The UK market is brushing off news that the like for like BRC shop sales fell 4.4% in April, its largest decline since the peak of the pandemic. Declines were concentrated in the non-food sector. The BRC claimed that the dismal sales report was down to two factors: adverse base effects due to the run up to Easter being in March in 2024, vs. April in 2023. To adjust for this difference, the BRC also reported the average sales figure for March and April, which was 0.2%. The second factor was bad weather, which weighed on demand for non-food items. Consumers delayed typical spring purchases such as garden furniture, and the wet weather hurt sales of sports clothing and foot ware. There is hope that better weather as we move into summer will entice buyers to spend more on clothing and homewares, however, the soggy bank holiday weekend just gone, does not bode well for May. The weakness in the BRC sales report for April has not had a negative impact on the share price of big retailers like Next and M&S, both stocks are rising on Tuesday. Next is higher by more than 1%, and M&S is up by more than 2%, as the market bets on sunnier weather boosting future sales.