Corporate results steal the show, as GBP/USD hovers near $1.30

Event risk, what event risk? Financial markets have started the week in sanguine fashion, with stock indices in Europe and the US all rising at the start of the week. European stocks have opened higher on Tuesday, and the S&P 500 is also expected to open higher later this afternoon. Currently the main US stock index is just over 40 points away from the record high set on 18^th October. Oil prices are staging a mild recovery on Tuesday, after Monday’s rout, however, the Brent crude oil price is still below $72 per barrel. The oil price is helping the positive risk environment, as it could weigh on inflation and price pressures down the line.

BP’s profit beat fails to excite investors

Markets are in a positive mood, and seem to be immune to event risk, including the US election that is a mere one week away. Corporate news is driving stock markets in the short term. BP’ s earnings were stronger than expected, but much weaker compared to the prior quarter. Revenue was stronger than expected at $47.25bn, and net income was $2.26bn, better than the $2.05bn expected, however, it was lower than Q2’s $2.38bn. Breaking down these results further, oil and gas profits were stronger than expected, although oil traders had a weak quarter, and profits were lower than in Q2.  Profits at the gas and low carbon energy division were also stronger than expected, however, capex spending was far higher than expected, at $4.22bn, compared to estimates of $3.82bn. BP’s debt pile also grew last quarter, rising to $24.27bn, bigger than estimates of $23.2bn. The title for this earnings report was ‘Driving Focus and efficiencies’. Apart from the fact that ‘driving focus’ is a meaningless phrase, the increase in capex spending and in the debt, pile does not suggest that BP is particularly efficient. Interestingly, BP reported flat fuel margins, even though volume of sales was stronger last quarter.  

Is BP’s share buyback programme at risk?

BP’s share price is down 1% at the start of trading on Tuesday, even though BP confirmed its dividend would be $0.08 per share, better than the $0.078 expected, the company also announced a $1.75bn share buyback. It has committed to a $1.75bn share buyback in Q4. BP said that it remains committed to its share buyback guidance for 2025 of $14bn, however, investors may be rattled by news that BP will review all of its financial guidance in February next year, thus the $14bn of buybacks for next year is not set in stone.

Overall, these were a dry set of results. The company expects Q4 upstream production to be lower than Q3, and refining margins are also expected to remain low in Q4, which could weigh on profits for this quarter.

HSBC adds to the global banking comeback

BP is the weakest performer on the FTSE 100 so far today, at the other end of the spectrum is HSBC and Standard Chartered. HSBC reported a strong set of results, and its share price is higher by more than 2%. HSBC also beat profit expectations, and pre-tax profit rose nearly 10% compared to a yar ago. However, it announced a mega $3bn buyback programme, which has piqued traders’ appetites for the stock. Net interest income levels were maintained, which could boost overall 2024 profit levels and HSBC’s share price is at its highest level since May. These results are in line with a strong performance from the global financial sector, led by JP Morgan. This suggests that the prospect of lower interest rates, are not weighing on the profit levels at the world’s major banks, as wealth units and investment banking activity roar back and consumer segments remain strong.

As we have mentioned previously, a strong financial sector is a sign of a strong economy. The US is expected to report annualized GDP of 3% for Q3 on Wednesday. UK growth is likely to have slipped in Q3, but could the strong performance for the likes of Barclays and HSBC, be a sign that the UK economy could bounce back in Q4?

The FX view

From an FX perspective, the market is stable on Tuesday. The dollar is still king, although USD/JPY has stabilized below 153.50, and the pound is up a touch vs. the USD at $1.2985, after picking up from last week’s lows around $1.29. The question is whether the ‘bad news Budget’, as we have started to call it, has front -loaded the sour aspects of tax increases, and will instead deliver some unexpected sweeteners? The key for sterling will be the OBR growth forecasts. If GDP is revised higher for the long term, and if debt levels under the new public sector net financial liabilities measurement remain stable over the long term, then the pound could recover back above $1.30 vs. the USD. However, the long-term future of the FX market will depend on the outcome of the US election, since the dollar is an integral component of the Trump trade.

How GBP/USD can get back above $1.30

Interestingly, the bond market seems to be ignoring the weaker oil price, and 10-year bond yields are higher across the board on Tuesday. UK Gilt yields are higher by more than 2 basis points; however, European yields are rising at a faster pace. As we lead up to Wednesday’s UK Budget, the 10-year Gilt yield is higher by 22 basis points in the last 7 days. This does not give the Chancellor any room for error. While rising bond yields usually boost the pound, in this instance, falling bond yields on the back of a well-received budget on Wednesday, could be the tonic GBP/USD needs to get back above $1.30.