12:00 Laura Ashley heads into administration
Laura Ashley (ALY) has collapsed, with the company laying the blame squarely on the immediate impact of the coronavirus outbreak. Shares are suspended and it looks to be the first domino to go. It's a classic case of being able to service high debt loads when cash flow remains steady but as soon as the revenues dry up, the debt crushes you whatever interest rate you may be able to get. It highlights the very real limitation in monetary policy right now - debt is about cashflow, not interest rates, for businesses.
As far as Laura Ashley is concerned it's a retailer that has really failed to move with the changing retail landscape. Its fashion business, once its largest, became secondary to homeware and furnishings as it was slow to respond to evolving tastes. In terms of responding to consumer trends, it's been slower than M&S even. Over the last few years there has been a series of profits warnings, a build up of debt and the business has required more capital to survive. But it's a double shame as there were just signs of life with sales up 24 per cent in the first part of the year before the outbreak hit.
Given the current equity and credit market conditions, it's not a surprise to see some weaker players that already require additional funds go under when cashflow is about to be decimated by coronavirus lockdowns. The key question this raises is to what extent we will see further high street losses because of the coronavirus.There is a spectrum of retailers and clearly Laura Ashley was on the end of those which are more likely to go under. But I doubt it's the last retailer to go bust because of this crisis.
08:30 Volatility spikes amid historic Wall Street rout
The fiscal put is coming – Japan, France, Australia, NZ et al are starting to respond with bigger spending measures to counter the effects of the virus. The UK is beefing up its response after the Budget's £30bn offer was considered to be short of the mark, while the market enjoyed a small bounce overnight as Donald Trump was said to urge lawmakers to adopt his approach to open the spending spigots. The monetary measures are in place, the fiscal response is slowly getting there. All we need now is for the virus to peak and all the ingredients for an epic market rally are in place – the unknown is the virus and the economic damage, but equity markets are currently well priced for a sizeable hit to the global economy. Until then epic volatility remains our companion.
Asia showed some signs of life overnight. Japan's Topix rose 2.6 per cent, while the ASX 200 in Australia rallied over 5 per cent after suffering its worst daily decline ever on Monday. US futures rose over 3 per cent, but on the whole Asian markets declined again. European shares are nursing losses from a wild session on Monday but are rising nicely in a typical rebound following a tough session. The FTSE 100 rose more 130 points on the open, but we remain dubious about any rallies having legs due to the implied volatility ahead. The DAX rallied over 4 per cent to regain the 9k handle. Key question is do we make higher highs and higher low closes on the rallies? And we need stability in bond markets that is yet lacking.
Yesterday was pretty catastrophic for financial markets, for investors and for any notion that central banks can do anything for risk sentiment in this environment. The Dow fell 3,000 points, or 13 per cent, its worst points day ever by a mile and only beaten in percentage terms by 1987's one-day crash. It's worse than 1929, and the Dow has lost a third of value in 3 weeks. It's an unprecedented drawdown.
Despite the Fed going all-in, global equity indices have tumbled, commodity prices are on the floor and we are now talking about multi-billion pound bailouts for industry. But what the Fed is doing is making the plumbing work; it's not here to support equity prices ultimately although that is very how we can view it. On that front, several major US banks have tapped the discount window, a move largely seen as symbolic to remove the 'stigma' of using this crisis-era facility. It should help financial markets function more smoothly. We wait to see if the bond market responds.
Until there is better knowledge of the situation on the ground, until the economic damage is know and until we see a genuine spike in cases in the US and Europe, volatility levels will remain extremely high. There had been chatter that regulators would start to think it's time to call a halt to this, that they will step in to shutter stock markets for a limited period in an attempt to regain control of the situation. Jay Clayton, the SEC boss, said otherwise, but it remains a possibility.
Bond market moves remain problematic, with large moves in US Treasury yields a concern for wider markets. As ever, look to the bond markets for your steer, but at the moment some of the moves plain don't make sense. That is not going to help stabilise equity markets - we need to see calmer days in bonds first. Meanwhile you have the Vix trading above 80, indicating significant option trading volume and expensive downside protection, so volatility is not going anywhere soon.
Widening in the spread between Italian and German paper is another worry. Increasingly you feel that this is a major test of the EU. Some 88 per cent of Italians say the EU is not helping. It's in times of crisis that you figure out who your friends are. We haven't even talked about the social and political consequences of the outbreak - they could be as seismic as the economic damage itself.
Oil has come off its lows but remains in a downtrend, with Brent slipping down 10 per cent to under $30 in yesterday's session. The combination of a massive supply surge from OPEC and a complete collapse in demand create conditions in the market which are the most bearish imaginable. I think we see WTI under $20 before long as the buildup in crude stocks is just going to be massive. The amount of spare supply on the market in the coming months will be scary and crude prices will fall further.
Equities
Compass Group is in the front line of companies facing damage from the coronavirus outbreak. The 'vast majority' of its Sports & Leisure and Education business has been closed in Europe and North America. Schools are closing fast, sports fixtures are being called off wholesale - it's a devastating combination for the group. The company has plenty of headroom with a £2bn revolving credit facility but the cash is not coming in the door so profits for the first half are expected to be by anything between £125m and £225m.
Dixons Carphone is finally swinging the axe: all 531 UK standalone Carphone shops are to close. Integrating Carphone fully with the main brand was always the right course. The company will create 305 shop-in-shops with Currys PCWorld sites instead. In many cases a lot of the old Carphone sites were only a short distance from larger Currys sites, so the rationale is plain - you can shutter stores and largely not lose market share. However it does mean 2,900 more retail redundancies.The group expects £200m positive cash flow benefit from the restructuring. On Covid-19, so far Currys has seen no impact of note, with sales resilient in the core UK market, but it does expect a hit to come. Sales of electronic goods should hold up reasonably well in this environment but footfall is bound to be down for white goods.
Neil Wilson is chief markets analyst at Markets.com
