Shell Issues Impairment Charge, Bailey Set To Take Over At Bank Of England

Shell Issues Impairment Charge, Bailey Set To Take Over At Bank Of England

CMC Markets  | Dec 20, 2019 09:25

As we come to the end of the last full trading week of 2019 it’s been a mixed week for European equity markets, as we come to the end of what looks set to be a good year for stocks.

The FTSE100 has reaped the benefits of last week’s election win by the Conservative party, as has the FTSE250 which hit new record highs this week. Markets in Europe have had more of a consolidation week at the end of what has been a decent year with gains in excess of 20% and a record high for the Stoxx600.

Today’s European open has been a fairly flat one, despite yet another record close for US markets, as US investors ignored the political noise around President Trump’s impeachment and focussed on the ratification of the USMCA trade deal in the House, the passing of a new spending bill, and the temporary ceasefire in the US, China trade war.

In terms of headlines, Royal Dutch Shell (LON:RDSa) this morning issued a profits warning after taking a Q4 impairment charge of between $1.7bn and $2.3bn, while reducing its capex guidance to the lower end of a $24bn and $29bn range.

This shouldn’t have been too much of a surprise given the company’s warning in Q3 when the company recorded a 15% slump in profits from $5.6bn in 2018 to $4.8bn. At the time the company warned that it might miss its targets to reduce its debt levels, and increase its payouts to shareholders, which this morning’s announcement appears to bear out.

This reduction in guidance and impairment appears to show that management underestimated how much weaker oil prices would be in the latter part of this year, as well as underestimating future demand for oil, along with its by-products.

At a time when renewables are starting to become more mainstream this warning does raise questions as to whether management are sufficiently attuned to the changing global environment around energy and climate change.

This should be concern for investors given that Royal Dutch Shell (LON:RDSa), as well as other players in the sector who are significant dividend payers. With climate change moving quickly up the agenda oil companies are squarely in the firing line at a time when spending on renewables is a very small part of overall capex spend.

Commerzbank (DE:CBKG) is also in the news on reports that it is continuing to look for buyers for its Polish unit MBank, with reports that Apollo Global Management is mulling a bid. Commerzbank has been looking to sell the unit, which is one of its more profitable areas, as it looks to shore up its balance sheet.

The pound has continued to look soggy, trading near one week lows as the hangover from last week’s surprise Conservative election landslide continues to reverberate. Having risen steadily from three year lows against the euro in August, to post three year highs last week, traders are now looking further ahead to the next stages in the Brexit process, as well as the prospect of a possible rate cut by the Bank of England early next year. This week’s sterling losses look set to see the pound record its worst week against the euro since July 2017.

In Bank of England news, Andrew Bailey, currently in charge of the FCA, and previously a deputy governor, will be replacing Mark Carney as Governor of the Bank of England at the end of January next year.

Presently being touted as a “safe pair of hands” he represents a degree of continuity for the central bank, and while that is a good thing in terms of a seamless transition the Bank of England has serious problems it needs to address around its forward guidance.

While Mark Carney may well have been media friendly in terms of his presentational style, the central bank’s forward guidance over his tenure has been less than impressive. It’s almost become a standing joke over the years, with the most notable example being the guidance that the bank would look at raising rates only when the unemployment rate fell below the 7% level, only for the central bank to do nothing. This uncertainty over the central bank’s ability to deliver on its guidance also means that there is currently no market consensus over where rates might go next year, unlike the Federal Reserve where the policymaker message has been much more consistent.

US markets look set to open slightly higher after yesterday’s record close despite the latest numbers from Nike (NYSE:NKE) coming in way above expectations. Revenues rose 10.2%, to $10.3bn, while profits rose 31.6%, coming in at $1.1bn. Higher profit margins across a range of brands including Converse appear to show that the company has been able to shrug off the headwinds of higher tariffs, though the shares did slip back in afterhours trading. This may be down to the fact that the shares are already trading at record highs in anticipation of decent numbers.

US final Q3 GDP numbers are expected to be confirmed at 2.1%, while the latest personal spending numbers for November are expected to show that US consumers went on a pre-Thanksgiving spree, with a rise of 0.4%, while personal incomes are expected to rise 0.3%..

Dow Jones is expected to open 13 points higher at 28,390

S&P500 is expected to open 1 point higher at 3,206

"DISCLAIMER: CMC Markets is an execution only provider. The material (whether or not it states any opinions) is for general information purposes only, and does not take into account your personal circumstances or objectives. Nothing in this material is (or should be considered to be) financial, investment or other advice on which reliance should be placed.

No opinion given in the material constitutes a recommendation by CMC Markets or the author that any particular investment, security, transaction or investment strategy is suitable for any specific person. "

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