After Davos and interest rate decisions in Japan and Europe, the big macroeconomic items
of the week will be the monetary latest policy announcements from the US Federal Reserve
on Wednesday 29th January and then the Bank of England on the 30th.
With regard to the US central bank, the CME Fedwatch survey currently puts an 84% chance
on no change in policy at this meeting, which would leave the upper band of the target range
at 1.75%. However, the same survey puts a 54% chance of at least one cut (and just a
6% chance on at least one increase) by year end.
As such the outlook statement may be telling, especially as the Fed’s apparent plan is
to leave rates unchanged all year at 1.75%.
Also watch for comments on the central bank’s intervention in the overnight bank funding
(repo) market since the autumn. Fed Governor Jay Powell continues to swear blind that this
is “Not QE4” but whether it is Quantitative Easing or not, three things are clear
One, the Fed’s balance sheet is swelling again
Two, the intervention looks set to run for longer than expected
Three, financial markets seem to be feasting on this cheap cash, as share prices have really
motored since the Fed began to pour fresh liquidity into the system last autumn.
This does however beg the question of what may happen when the Fed starts to withdraw
this support.
Back here in the UK, the chances of a rate cut seem to be rising after recent weak GDP,
PMI and retail sales readings, though you could argue that all of these were still affected
by the former Brexit deadline of 31 October and the General Election of 12 December. With
the Budget due in mid-March, the Bank of England might decide to wait and see if there really
is a bounce post-Brexit and how much extra money the Government is going to spend.
Then again, it might not.
In December the Monetary Policy Committee voted 7-2 to leave interest rates unchanged
at 0.75% and 9-0 to leave Quantitative Easing at £435 billion but a third member of the
Monetary Policy Committee, Mr Vlieghe, now seems to be leaning toward joining Jonathan
Haskel and Michael Saunders in calling for a cut.
The Bank of England is still running its QE scheme, which topped out at £435 billion.
It has stopped adding to this but it is not exactly dashing to withdraw or sterilise it
either, and the market does not expect any change at this meeting.
On the corporate front, we have a growing number of results releases and trading statements
from FTSE 100 and FTSE 250 and small cap firms due in the coming week. They include
Petra Diamonds on Monday 27th January
Virgin Money UK, house builder Crest Nicholson and PZ Cussons on the 28th
Wizz Air on the 29th
BT, Evraz, St James’s Place, Unilever, TalkTalk and Diageo on the 30th
And finally SSE and Shaftesbury on Friday 31st January
But for all of those the name perhaps the stock most capable of causing a fuss in the
week ahead is oil major Royal Dutch Shell, which is due to its full-year results on Thursday
30th January.
As we can see here shares in Shell are down a little bit over the last 12 months, lagging
the FTSE 100 and also the oil price, which is up by around 7% in dollar terms.
This modest showing comes despite a pledge from chief executive Ben van Beurden to return
$125 billion of cash to investors via dividends and share buybacks. That compares to a market
cap of £177 billion or $231 billion – so more than half, in dollar terms.
However, three issues are hurting Shell’s shares
First oil may have rallied late in the year but only because OPEC oversaw another cut
to output. Overall, the market feels well supplied right now
Second, natural gas price prices continue to sag, thanks to rampant output growth from
US shale fields in the USA
Third, the pushback against fossil fuels and hydrocarbons is gathering pace. This may mean
fund managers and investors running Ethical, Social and Governance (or ESG) screens start
to avoid or sell shares in firms such as Shell.
This combination forced Shell to cough up a profit warning in late December. The company
lower its oils products sales forecast and also said it would write down the value of
certain assets by between $1.7 billion and $2.3 billion, joining Chevron, BP, Repsol
and Equinor in taking similar hits.
Besides the degree and location of those write-downs, which will hit the stated figures, investors
and analysts will dig into three main sets of figures when they look at the full-year
numbers.
The first is the mix of earnings. Gas, upstream (which is oil exploration and production)
and downstream (which is refining and petrol stations) are all expected by analysts to
show a drop in profits on a year-on-year basis. That divisional mix means that full-year current
cost accounting earnings, which adjust for movements in the value of inventory, will
reach $18.1 billion, down from $21.4 billion a year ago. Note that for 2020, analysts are
expecting a recovery to $20.5 billion, helped by the assumption a modest increase in Brent
crude to $71 on average and broadly flat gas prices of $2.75 for one million British Thermal
Units.
The second is cash flow. Shell got through the oil price’s collapse down to around
$30 in 2015-16 by cutting investment, selling assets and raising debt. None of those three
are a sustainable way of paying a dividend and the good news is that free cash flow more
than covered the dividend in 2017 and 2018.
The second is cash returns. Shell pays a dividend of $0.47 a quarter or $1.88 a year and no
change is expected there. The actual cash payout comes to around $15 billion or £11.5
billion by the way and implies a dividend yield of around 6.5%. Comments on buybacks
will also be noted. They totalled $7.3 billion in the first nine months of 2019.
After the hard numbers, analysts will look to the ESG issue and Shell’s strategic progress
in the field of renewables. Do note that Shell already owns
substantial amounts of solar power capacity a stake in solar panel manufacturer SunPower
NewMotion, an operator of more than 40,000 home-based charge points for electric vehicles
across the UK, France, Germany and the Netherlands And battery expert Saft
Moreover, Shell has committed 10% of its research budget to renewable energy and around a quarter
of development spending on low-carbon initiatives.
Aha, some of you will counter – that still some 90% of R&D is still focused on non-renewables
and you may not feel Shell is doing enough to meet your own, personal ESG criteria – but
that is a decision only you can take.
Thank you for watching and I look forward to seeing you next time.