Oil stocks lift FTSE 100, fears over impact of Evergrande liquidation on China’s financial system, Chill Brands and Supreme hit by disposable vaping ban and Ryanair lowers profit outlook

“The FTSE 100 started the week flat as a strong showing from heavyweight oil stocks helped make up for weakness elsewhere,” says AJ Bell Investment Director Russ Mould.

“Oil prices advanced thanks to a renewed escalation in Middle East tensions, with a further attack on shipping in the Red Sea by Houthi rebels and three US soldiers killed in a drone attack on a US service base on the border of Jordan and Syria.

“Crude hitting its highest level since November feels ominous given it adds inflationary pressure at a time when borrowers and the markets are hoping to see interest rates cut. Geopolitical factors seem to be propping up oil at a time when the wider dynamics of supply and demand look less than favourable for the energy market.

“Investors may keep their powder dry as they await crunch central bank meetings in the US and UK on Wednesday and Thursday this week. These could dictate market sentiment heading into the spring.”

China / Evergrande

“The Chinese government does not like it when things go wrong, whether that’s failing to sustain strong economic growth, companies not following the rules or foreign countries making life harder for the Asian superpower. It has clearly reached breaking point as there is an ‘enough is enough’ initiative which could have significant importance to the country and its economy.

“Evergrande is being forced to liquidate its assets. The troubled property developer had become the poster child for problems in China’s real estate sector in recent years and attempts to restructure its debts haven’t worked.

“Creditors shouldn’t hold their breath for a quick resolution or even large recoveries on the money they are owed.

“The big question now is how this might impact the financial system if investors big and small only get a fraction of their money back, and aspiring homeowners don’t get the home they’ve bought as buildings remain unfinished.

“People could lose the deposits they put on Evergrande homes, building material suppliers could struggle if they aren’t paid and some might even go bust, and banks and other lenders might have to be more selective over whom they lend to if they’re faced with a barrage of bad debts linked to the Evergrande collapse.

“It seems clear the Chinese government might need to step in with some hefty support initiatives. It won’t let the major banks get into serious trouble, but there is now a huge question mark over the pace of economic growth in the near-term.

“Foreign investors are certainly going to view China as even higher risk than it was before as there are so many uncertainties over the ripple effects from Evergrande’s liquidation.”

Disposable vaping ban - Impact on companies on the stock market

“The UK government’s intention to ban disposable vapes has caused two stocks on the London market to take a tumble. Chill Brands saw its share price fall by a third while vaping supplier Supreme dropped 11%.

“Rishi Sunak made it perfectly clear last year that he will not tolerate the rise in young people taking up vaping so the ban on disposables seemed inevitable, following on from last year’s plan to create a smoke-free generation.

“Sales of vapes have grown in recent years, with numerous manufacturers and suppliers capitalising on the trend by offering more products in as many flavours and styles as you can imagine. Naturally, companies caught up in the government’s clampdown face a sharp hit to earnings if there continue to be new measures to stamp out bad habits involving vaping among consumers.

“Chill Brands implies it is not affected by the latest announcement because recharging ports on its products mean they are not classified as disposable. The market seems to question this logic given the fierce share price sell-off. Effectively, investors are saying there is a major risk to earnings, whether it is from Sunak’s latest announcement or the general direction of travel by the government to stop young people getting into the vaping habit.”

Ryanair

“Ryanair has never had a policy of making friends – with chief executive Michael O’Leary a living, breathing exemplar of its robust and combative approach.

“However, its belligerence seems to have had a negative impact after it was cut from some booking sites in early December, seemingly over a wrangle about online agents scraping Ryanair fares from its own website. This is a key reason why the company is cutting its profit outlook.

“With O’Leary calling the firms in question ‘pirates’ when the issue the first came to light in early January the prospects for a rapprochement look slim. Shareholders will have to hope guidance for the issue to be a temporary one proves accurate.

“The other contributor to the earnings downgrade is likely to lead to wider turbulence in the sector as the company flagged a big increase in fuel costs. The recent rise in oil off the back of tensions in the Middle East could see this become an increasing issue for the industry.

“Finally, Ryanair is caught up in another hot button issue in the aviation sector as it faces the prospect of further delays on the delivery of new, more fuel-efficient, Boeing 787 MAX 8 aircraft.

“Despite Boeing being embroiled in a safety scandal, Ryanair has delivered a notable vote of confidence in the plane maker, offering to buy any 737 MAX 10 aircraft rejected by US airlines ‘at the right price’.”

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