Weekly Market Update- Week Ending 06/05/2022

With inflation soaring and central bankers playing catch up, it was highly likely interest rates were going to increase this week. The question was though, by just how much?

In the US, the Federal Reserve announced on Wednesday night a 0.5% increase to a range of 0.75% to 1% and closer to home on Thursday the Bank of England raised rates 0.25% to 1%. Central banks are now walking a tightrope, trying to bring inflation down while not choking economic growth, which could cause the economy to slide into recession. They are also desperate to avoid a repeat of the ’70s, which saw a stagflation environment where growth slowed, and prices rose rapidly.

As earnings season continues, the energy sector was in focus with both UK heavyweights BP and Shell reporting quarterly figures. These two companies represent around 13% of the entire FTSE 100 index and have the power to influence both the headline performance and the dividend yield of the index. With oil prices at multi-year highs, investors were expecting bumper earnings. The actual results surpassed even these elevated expectations.

BP’s first-quarter profit was the highest in more than a decade at $6.2bn, smashing expectations of $4.5bn and up from $2.6bn in the same period last year. The oil major announced a further $2.5bn of share buybacks and managed to reduce net debt for the eighth quarter in a row. At a headline level, however, BP reported a loss of $20.4bn due to the write-down of its Russian business following the invasion of Ukraine.

With energy bills soaring, there have been calls for a windfall tax to be applied to oil companies. In the face of these calls, BP announced it would invest £18bn in British energy by 2030. This will include not only green initiatives like offshore wind farms but also investment in the North Sea to help the UK’s energy security.
In a similar vein (and stoking the windfall tax fire), Shell announced profits of $9.1bn, nearly three times that of the same period last year and its highest ever. The company increased its dividend by 4% and was able to reduce net debt by around $4bn to $48.5bn.

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John Naylor, Chartered FCSI – Head of Investment Committee