European markets basked in the afterglow of yesterday’s gains on Wall St. In early trade, the FTSE 100 is up around three quarters of one percent, with the DAX about half a percent in the green amid a general improvement in sentiment.

But Dow futures are about 200 points offside this morning so there is still plenty of volatility in there. We note that US ten year yields remain close to 2.8%, while the Vix remains elevated at around 30 and this suggests the relative calm of the last 18 months has ended and we are in now in store for more gyrations in equity markets. Certainly there is a risk that yesterday’s rally is a fake out before another selloff.

Tesco shares dropped on an equal pay claim that by some estimates could land the company with a bill for £4bn.  Investors may take some time to really assess this as it has come out of the blue, but it appears to be a serious claim and one that clearly poses downside risks to the stock. Tesco’s market cap is around £16bn with underlying profits last year of £1.2bn, so a £4bn bill would be significant. Net debt has been coming down so this would smart particularly as it comes just as the Booker tie-up is supposed to produce margin accretive revenue growth and cost synergies.  Tesco shares fell about 1% in early trading as investors reacted to the news, although it’s possible this could go further once we get a clearer picture of the risks involved.

Shares in SSE and Centrica each rose by about 1% thanks to Ofgem, which has raised the level of the ‘safeguard tariff’ by £57 a year from £1,031 to £1,089. Small crumbs from the regulator though, with shares in SSE still down 20% over the last year and Centrica about 45% lower. The planned energy price cap remains the big risk, while declining market share is also a problem for the big six.

Rio Tinto shares gave up early gains to trade almost flat as investors seemed less than impressed by the record dividend on offer. Higher commodity prices and lower operating costs left it with operating cash flow of $13.9 billion, a full year dividend of $5.2 billion and a $1 billion top-up of the share buy-back.

In the US last night Snap was the big story with the shares popping more than 20% in after-hours trading, a nasty move for some as many long-term shorts were squeezed out. Perhaps the most tangible win for the longs and a source of immense relief for investors is the slowing in the cash burn – this fell to just $225m in the quarter, 49% lower than the preceding three-month period. Better, but questions still remain over whether the rate of the cash burn is sustainable.

There were some really positive numbers in the release though. Revs were up 72% and average revenue per user climbed 46%, suggesting that it’s doing a better job of monetizing its products. It has to attract more users from a wider demographic, i.e., adults with cash to spend, not teenagers. The redesign of its app is important in this but daily user figures are still not growing that fast. Daily active users rose by 18% to 187 million, but this is not significantly higher than the 14% reported by Facebook, which is far larger. Moreover, direct competitors are still doing better:  Instagram Stories – Facebook’s Snapchat rival – has around 300m users.

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