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Market Watch: Shares in Rolls-Royce soar

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THE second-quarter quarterly earnings reporting season and more dovish stances from central banks pushed markets forward last week. The blue-chip S&P 500 and technology-focused Nasdaq indices gained 0.8% and 2.0% respectively.

Shares in Rolls-Royce jumped more than 20% on Wednesday after the company raised its profit forecast in an unscheduled trading statement. The British engineering company said that it expected operating profits for the first half of this year to be between £660 million and £680 million, more than double consensus analysts’ forecasts, underpinned by the strong rebound in international travel.

Rolls-Royce generates most of its earnings from charging airlines for the number of hours its jet engines are in the air. Its shares were hit hard during the pandemic and new chief executive, Tufan Erginbilgic, took charge at the start of the year with a mandate to improve profitability and cut costs. The early signs are encouraging.

The post-pandemic recovery in travel has also enabled airlines to generate record profit, including IAG, the parent of British Airways, and Air France-KLM.

IAG, which also owns Iberia, Vueling and Aer Lingus, reported a first-half operating profit of 1.3 billion euros, versus a loss of 446 million euros in the same period last year. IAG’s flight capacity has recovered to 94% of pre-pandemic levels and fares are on average 9.5% higher than a year ago. Chief executive Luis Gallego added that ‘very strong leisure demand’ across all of its airlines had more than offset sluggish demand for business travel, particularly long haul.

Air France-KLM announced that its second-quarter operating profit had more than doubled to 733 million euros as higher fares offset a 5% increase in the airline’s costs. The airline, which required emergency support from the French and Dutch governments during the pandemic, has also made strong progress reducing its debt by 1.4 billion euros since the end of December to just under five billion euros.

Two of technology’s heavyweights also reported their second-quarter earnings last week with contrasting fortunes. Microsoft shares fell 4% on Wednesday despite its $56.2 billion revenue exceeding most analysts’ forecasts. Instead, investors focused on slowing revenue growth at its cloud services business Azure, +27% versus +31% in the previous quarter, and the heavy investment needed to run complex AI systems. Despite the setback, Microsoft shares have gained 40% year-to-date.

Shares in Google’s parent Alphabet gained 6% after it announced better-than-expected revenues of $74.6 billion for the quarter on the back of strong growth in its cloud computing unit. Its digital advertising business, including Google ads and YouTube ads, also fared better than expected, contributing $18.4 billion to net profit.

The Federal Reserve raised US interest rates by another 0.25% on Wednesday evening to their highest level in 22 years. While policymakers expressed some concern about elevated inflation, chair Jay Powell acknowledged that previous rate hikes take time to work through the system and future decisions would be more data dependent. Markets are now pricing in a higher probability that the Fed’s next move will be a rate cut in early 2024.

The European Central Bank also raised its deposit rate by 0.25% to 3.75% a day later, its ninth consecutive hike, and similarly signalled it is open-minded about decisions in September and subsequent meetings.

Eurozone inflation has slowed from a peak of 10.6% last year to 5.3% in July and although it is well above the ECB’s 2% target rate, President Christine Lagarde added that there was a possibility of a pause at the next meeting.

Global oil prices moved higher for a sixth straight week, including brent crude which rose $3 to $85 a barrel, on concerns of a supply deficit. The International Energy Agency forecasts global oil demand will rise by 2.2 million barrels per day to a record 102 million this year but daily production is only expected to rise to 101.5 million. Saudi Arabia, the world’s largest exporter of crude oil, has extended its production cut of one million barrels a day until the end of August.


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