Fossil Fuels on the Fire

BP led the FTSE 100 higher after delivering bumper profits in the final quarter to round out a record year for the company, with shares up almost 4% to a three-year high. Profits doubled to $27.7bn, the most ever. Underlying profits rose to $4.8bn in the final quarter. The company also increased the dividend by 10% and announced $2.75bn in buybacks – not quite keeping up with the Jones after Shell did 15% and $4bn. Truly great results and the strategy update displays a confidence with more investment in short cycle oil and gas projects to deliver what we need now, and more investment in transition growth and green stuff to deliver what we will need in the future. Scaling back plans to reduce oil and gas production signals that for all the chatter, energy security right now is all about fossil fuels. Until you have the green bridge you have to keep pulling it out the ground.  

More Oil Making for a Slippery Slope? 

Yet, as the old adage goes, ‘mo’ money mo’ problems’. Bumper profits make an easy target for a venal Treasury looking for someone to squeeze. And all the usual suspects will be calling for yet more windfall taxes...how about maybe the government – urged on by the lockdown fanatics – had not been so profligate with our money during the pandemic? How about the government had enacted sensible far-sighted energy policy for the last 20 years instead of relying on cheap gas? Decades of energy policy failure, but sure just keep squeezing and blaming the companies that are providing the fuel we need. Elsewhere, Crude oil rose for a second day after Saudi Arabia raised selling prices for Asia for the first time in six months. The earthquake in Turkey and Syria also raises near-term supply concerns after the former halted flows to the Ceyhan terminal – though this morning it has ordered resumption of flows, whilst crude flows from Iraq and Azerbaijan have also been affected. 

European Stock Markets Mixed, Yields Rise 

Whilst London rose, shares in Frankfurt declined somewhat and Paris was flat in early trading on Tuesday. German industrial production fell 3.1% on the month in December – a big miss and worrying sign of contraction at the end of the year.  Yesterday yields moved higher in the wake of the jobs report as markets priced out some cuts and bought a little more into the higher for longer narrative. We have seen some very abrupt moves, particularly in the front end as markets have reacted rather aggressively to the jobs report. We saw the 10-year yield up 11 basis points at 3.64% and the 2-year yield adding around 18 basis points to 4.48% - something like 40bps since Friday morning. Higher yields undid some of the multiple expansion-driven rally this year, nudging the Nasdaq down 1% and leaving the Dow Jones almost flat for the session – rotation back out of growth and into value in a reversal of the trend thus far this year.  

Impromptu Fed Speech Today 

Jay Powell, the Federal Reserve Chair, is delivering a speech today that was interestingly only added to the calendar last Friday. Being as seemingly spontaneous as it is, there is some understandable anticipation as Powell may address market expectations of a pause in Fed action and clarify his recent comments on disinflation and financial conditions. Some market participants believe that Powell's previous remarks that financial conditions have 'tightened' are misaligned with the current market reality, where financial conditions have actually loosened. The speech could provide insight into the Fed's stance and future actions and is bound to incite some impact in general short-term market sentiment at the very least.  

In the Charts Today 

There have been a few ‘golden crosses’ in FX lately, but the talk is about the S&P 500 after last week’s bullish signal. I’m not always convinced about it in the near-term, but BofA analysts point out that “SPX returns after a golden cross are the most solid 30, 65 and 195 days after the signal with the index up 75% of the time on stronger than average returns.” And they point out that this is a bullish signal particularly around a recession. "Unless the US economy is already in recession, or the US equity market is extremely forward-looking this cycle, these golden cross signals typically occur toward the end or just coming out of the recession."  

EURUSD – testing the 50-day SMA (golden cross in blue).  

GBPUSD–after Friday’s trend break the cross is stabilising at 1.20 but through the 50-day line and looking to retest the 200-day and 23.6% retracement at 1.1950.  

USDJPY – also testing the 50-day line following the death cross (the opposite of a golden cross).