Royal Dutch Shell Warns On Profits/Investors Question Expensive Stock Market Valuations - ETX Capital

Royal Dutch Shell this morning warned on profits, expecting annual earnings to be significantly lower than levels seen in recent years. Worrying news from the oil major which is clearly suffering from management’s inability to get on top concerns regarding capital discipline. Shell warned of disappointing results from its upstream, downstream and corporate business divisions; higher exploration costs and softer oil prices are blamed for the poor numbers – this is unlikely to change this year leaving markets worried about the group’s outlook. Shell is not an isolated case however, as weak industry conditions for downstream oil is likely to hit sector peers too. For Shell itself, management must now implement more aggressive targets for group strategy in order to turn a page and improve capital efficiency which would go some way in improving operational performance. With the shares down over 6% in 2013, management are now under pressure to improve group finances with a strategy update in the spring of this year – if strategy is compelling enough, traders are likely to pile back into Shell to take advantage of the low share price.

Onto markets, steady price-action for Europe this morning but overall sentiment dented by poor earnings out this week from the US; overnight, Intel’s numbers left investors feeling less than enthusiastic about the group’s outlook as the group expects no revenue growth in 2014. Citigroup yesterday released a damp set of figures whilst Goldman Sachs’, although beat expectations, are certainly not strong enough to instil confidence in the sector. The unimpressive start to the earnings season now leaves us questioning market valuations across US and European indices in which stocks are expensive but earnings are not justifying forward P/Es. S&P500 rose 30% in 2013, the DAX in Germany added 26% for the year and the Stoxx 600 index added around 17%; traders are now of the view that with earnings not matching index valuations, it would be wise to take profits. That’s compounded by the fact that the Fed’s tapering process which kicked off this month will ramp up market volatility.

Asian markets overnight expressed their hesitation toward just that; capital outflows continue out of the region and are likely to show signs of easing as developed economies attract capital inflows on better economic conditions; markets think the recoveries in the US and UK warrant monetary tightening earlier than set out in forward guidance by the Fed and BOE respectively. Looking ahead, we have some key data to keep watch of: UK retail sales will dominate the headlines in Europe as well euro zone construction output. Over in the US later, watch out for housing starts and building permits together with industrial output data and the Michigan confidence report. Earnings wise, Morgan Stanley and GE are due to take the stage with numbers.

Ishaq Siddiqi
Market Strategist
ETX Capital
etxcapital.com

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