The latest oil price movements are both a pain and a gain for UK investors.
Brent crude edged higher, hitting $91.45 a barrel in early trading as tensions intensified in the Middle East. That’s bad for businesses and consumers, but good for the FTSE 100’s oil heavyweights BP and Shell who propped up the UK blue-chip index amid a broader European market pullback.
Efforts to bring an end to the war have not been successful, and reports suggest Iran will now become more aggressive. That raises the risk of further disruption to oil supplies out of the Middle East, hence why inflation fears and potential interest rate hikes are front of mind for investors. This scenario is negative for equities as it can dampen risk appetite.
Central banks typically raise interest rates when inflation rises above target, which generally puts downward pressure on company valuations. Higher interest rates can also lead to higher bond yields and make fixed-income assets more attractive to investors relative to riskier assets such as equities.
In the US, the 30-year Treasury yield reached a 19-year high of 5.33%. In the UK, the 30-year gilt traded at 5.85% – the highest level since May this year. Rising long-dated bond yields are not driven solely by expectations of higher interest rates and inflation fears. They can also reflect concerns around high levels of government borrowing and investors demanding greater compensation for the risks of holding long-dated government bonds.
Among UK mid-caps, IT provider Kainos jumped 16% after it said full-year results would beat market expectations. It continues to enjoy a purple patch with contract wins, giving management confidence the business will go from strength to strength.
BHP
Copper overtaking iron ore as the biggest contributor to annual profit at BHP is a key milestone, reflecting the increasing importance of the metal to the mining industry.
Expansion in data centres, energy infrastructure and electric vehicles is heavily reliant on copper thanks to its role as a critical component in electrical systems. This is creating unprecedented levels of demand and sustaining record prices for the metal as we enter a new copper age.
Recently appointed CEO Brandon Craig was explicit in describing copper as the engine behind BHP’s growth, with a good portion of the cash generated by existing operations being used to fund continued development in this area. Shareholders will be pleased to see there’s some cash left over for them too, with a healthy increase in the dividend. All in all, these full-year results underline what has been a promising start for Craig at the top.
The muted market reaction to BHP’s results suggests investors haven’t taken a shine to the numbers but should be seen in the context of a 40% year-to-date advance for the shares.
BHP tried to take a short-cut to increased copper output with a failed attempt at a merger with Anglo American under Craig’s predecessor Mike Henry, and the market will continue to monitor the company’s M&A ambitions closely.
Dan Coatsworth: Head of Markets
Dan Coatsworth is AJ Bell's Head of Markets. Dan has been with the company since December 2012 and has more than 18 years' experience in the industry, following the markets and all things investing. He...
