Midday round up: FTSE 100 gets hit by weak earnings, as public finances raise questions for BOE, and we wait for Nvidia

The big news on Wednesday was that the UK public sector finances were in good shape for January. The UK recorded its largest ever January surplus at £16.7bn, which means the UK had more tax receipts coming in and less borrowing. It is worth noting that this was a smaller surplus than analysts had expected, but it does provide another piece of positive news for the UK economy. Borrowing is also less than a year ago, and central government borrowing needs were also in surplus, at £19.5bn. This surplus means that the UK’s net debt as a percentage of GDP was 0.2bps less than the most recent OBR forecast, although net debt has grown by 1.8% since January 2023. While this data is good, the January surplus is pretty traditional for the UK economy and inflation is what is driving it higher, so referencing it as a ‘record’ is pretty much meaningless.

Fiscal headroom, the Budget and what it means for the BOE

However, there are two questions that arise from today’s public sector data: 1, what does this mean for the fiscal headroom, and the prospect of tax cuts in next month’s budget? 2, what does this mean for the BOE? Looking at the second question first, as mentioned, the ‘record’ surplus does not mean that the UK is firing on all cylinders and generating cash significantly faster than before. The surplus was lower than expected, and tax receipts were actually £1.8bn less than a year before. Economic growth is still likely to remain sluggish, so today’s data is unlikely to factor into the BOE’s decision on when to cut rates. However, the question about tax cuts is now getting interesting. There could be as much as £20bn for the chancellor to play with, according to some estimates. However, if he does cut taxes, which he has said he would like to do, it would essentially be a tax cut squeezed in between tax rises – with more people moving into higher tax bands in recent years. Thus, a tax cut next month may not lead to much extra consumption and may only have a minimal effect on inflation. Again, this should not move the dial for the BOE, who sounded fairly dovish when Andrew Bailey testified to Parliament on Tuesday. UK short-term bond yields have backed away from earlier highs and remain fairly stable ahead of the FOMC meeting minutes due later on Wednesday. EUR/GBP is stable and after falling at the open, GBP/USD is now clawing back some losses and has managed to stay above the short-term support at $1.2600.

FTSE 100 gets dragged lower by HSBC, Rio Tinto and Flutter

Elsewhere, the FTSE 100 is the notable underperformer in the European session so far. The index is being dragged lower by Flutter, ahead of its US listing, and Rio Tinto. The latter is coming under pressure after reporting a 12% decline in profit as industrial commodity prices come under pressure. Although profits fell, the company will still pay a larger dividend, at $2.58 per share, compared with $2.25 last year. Although the decline in profit was mostly in line with analyst estimates, the weak outlook for iron ore production as the iron ore price continues to sink has sparked concern amongst investors. It will also spend $1bn a year on closing facilities, which weighed on free cash flow forecasts. This is also driving some of the weakness in the stock price on Wednesday. There was some good news, Rio Tinto has signed more renewable deals in Australia, and it also said that it is not affected by the unrest in the Red Sea as this is not a major shipping route for the miner.

HSBC may need to pivot away from China

Elsewhere, HSBC has continued its slump after it posted messy earnings on Wednesday. It is down more than 7% on Wednesday and is back to mid-January levels, undoing its recent rally. HSBC may have posted record revenue and return on tangible equity in the mid-teens; however, revenues were lower than expected at £30.35bn, vs exp of £34.12bn. Q4 earnings were a weak spot for HSBC after a decent 2023, due to a large impairment charge from a Chinese bank holding. Investors are focusing on the weak Q4 results, even though the bank increased its share buybacks and boosted its full year dividend to the highest level since 2008. The bank increased its bonus pool and doubled the pay of the CEO, which may not be going down well, since the bank said that costs would be 5% for this year. HSBC is also slashing loans and advances to global real estate by 13%, as this sector comes under pressure. The HSBC boss said China’s real estate market has bottomed, however, he didn’t sound too bullish on China, where the company does a large portion of business.  Interestingly, pre-tax profit is now higher for HSBC in India than China, which is a real sign of the times, and also highlights how the bank may want to pivot away from China in the coming quarters. Interestingly, while HSBC sinks, Barclays continues its march higher after a warm reception for its strategic review on Tuesday. In this earnings season, stocks aren’t moving in a block, instead investors are reacting to the individual earnings reports and the details included in them.

Waiting for Nvidia

The big news will be Nvidia results due after the US market closes tonight. The hype around these results is as big as before a Fed meeting and Nvidia’s earnings report may have a bigger impact on the overall stock market than the Fed! This is because Nvidia is the best performing stock on the S&P 500 this year, 5 stocks have fueled 75% of the S&P 500’s year to date gain. Added to that, Nvidia stock price’s gain this year is more than the next two best performers – Meta and Microsoft – combined. Nvidia is considered the vanguard of the AI theme and as its chips have a 98% share of the GPU industry. However, Nvidia shares fell sharply on Tuesday and were down 4.35%, they are also scheduled to fall another 1.5% on Wednesday. Since Nvidia is so important for the direction of overall stock markets, the outcome of this evening’s report could be decisive in where stocks go next. We already expect a monster report, so the focus for this earnings release is what Nvidia forecasts for the future. Will it see more competition, and could this eat away at revenues in the future? If yes, then we could see a lot of volatility for markets in the coming days. But, if Nvidia signals that the future is rosy, then we could expect another leg higher in the recent rally.