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Market Outlook: European stocks try to close the week higher

Equities looking upwards in Europe this morning
March 20, 2020

European markets traded higher again Friday as the first tentative signs of stabilisation are built upon. False optimism perhaps – the full extent of the economic damage remains unknown, yet markets tend to move ahead of the real world and will be pricing for 2021-22 already – global stocks will overshoot and bottom out well ahead of the real economy. On the other hand, a drawdown of this scale usually takes months to play out.  Picking a bottom is always the hardest part of trading.

London, Paris and Frankfurt rose 5-6 per cent at the open after a positive session on Wall Street was followed up by stocks finding bid in Asia overnight. We could see European indices move back to the flatline for the week or even go positive – if they can ride out this week unchanged or better it would be a major positive.   

The FTSE 100 drove up through 5400 at the open. We’re looking for anything around last Friday’s close at 5366.11. There would something very symbolic about closing above here, so this may prove a substantial point of resistance. Banks are trading +5 per cent after the Bank of England scrapped stress tests – I think this situation rather counts.   

The problem as ever is the weekend risk – are investors prepared to hold much of a book over the weekend? And, of course, whilst we see glimpses of stability in markets, volatility remains elevated and uncertainty over the economic outlook is high.   

Following the Bank of England’s decision to expand QE by £200bn of chiefly UK government debt, Chancellor Rishi Sunak will today outline further measures to support businesses and workers with lots of headroom to pay for it. 

In FX, the pound has broken through the trend resistance on the 50-hour moving average at 1.18, which proved to be a ceiling yesterday. GBPUSD back off that after its first tilt all the way back to take a 1.14 handle overnight, before staging another rally, this time with more oomph. We’re now around the neckline of this bottom formation and facing fresh resistance at the 23.6 per cent retracement level of the rout of the last fortnight around 1.1820. EURUSD is moving back off the lows to regain 1.08 as of Friday morning, whilst the yen was also on the front foot as USDJPY retreated to 109. 

There are just signs there that the moves by the Fed to ease this dollar liquidity squeeze are starting to produce results. Three-month euro-dollar swaps have tightened to 9bps against 84bps on Monday.  Oil has extended gains, adding another couple of handles to $27.50. 

 Equities 

More companies are being drawn into the coronavirus net. IHG is another that you would call on the front line of disturbance. It says demand for hotels is currently at the lowest levels it has ever seen. Global RevPAR decreased 6% across January and February, with a broadly flat performance in the US offset by declines in Greater China, which saw an almost 90% decline in February. For March and April, the collapse in travel and tourism means management see a 60% decline globally. To offset, IHG is reducing capex by $100m and pulling its dividend. 

Marks & Spencer is also pulling its dividend and slashing its capital commitments. Management says it is not possible to provide meaningful guidance on future earnings. Full year 2019/20 profit before tax is seen at the bottom of the range of £440m-£460m – it was all on track until the last week, when Clothing & Home sales seem to have collapsed. More people eating at home should boost Food sales of course. Taking measures like reducing capex to the bare bones and scrapping dividends is entirely prudent and sensible, but it’s not going be much help to investors. 

Neil Wilson is chief markets analyst at Markets.com