European markets finished perky last Friday but the outlook at the start of a new trading week looks uncertain and volatile. London, Paris and Frankfurt were all trading 4-5 per cent lower in early trade Monday, after US markets fell 4 per cent Friday to close the week down 15% and futures hit limit down overnight Monday. Asian shares were offered across the board, with the ASX 200 down 5 per cent, and Hong Kong down more than 4 per cent. For the FTSE 100, the key 4900 low is being tested this morning.
Markets are again showing stress on fears that the economic damage will be worse than anticipated and that the response by governments and central banks will not be enough to prevent a mammoth recession.
James Bullard, president of the St Louis Fed, said US unemployment could reach 30% in Q2 due to coronavirus shutdowns, while he warned GDP could decline by 50%. This would be an unprecedented event.
The US Congress has failed to pass its $2tn stimulus package but the GOP is going to try again today before the US market open around noon London time. The funding did not get enough votes in a key Senate procedural vote on Sunday – Democrats said it was too focussed on companies and didn’t do enough for workers – the two sides need to come together fast or there won’t be companies to bail out. The 47-47 vote meant it didn’t clear the 60-vote threshold required – but with 5 Republican Senators in self quarantine it will not be easy. If the Senate cannot come together Senate Majority Leader Mitch McConnell will force something.
Germany though does seem set to break its fiscal rules and intends to set up a €500bn rescue package for business and authorise €350bn in new debt to fight the outbreak.
Crude remains weak, testing lows just below $21 and this morning failing to catch any bid north of $23.
Blue-chips scrapping guidance
The virus continues to take a bitter toll on companies, and we see a number of FTSE 100 players scrapping guidance, dividends and buybacks. Governments won’t be keen on bailing out firms that keep handing out cash to shareholders in this environment. Shareholders are going to be at the back of the queue.
Kingfisher - Trading in the 6 weeks through to Mar 14th, before any COVID-related store closures, was positive with group LFL sales +7.6 per cent, albeit a more modest +2.3 per cent excluding the leap year impact. Trading since then has been positive still in the UK but the decision to close all its French stores has severely impacted revenues. Online sales have grown significantly in recent weeks – you should expect a benefit in DIY (B&Q) sales if people are forced to stay home for protracted periods, however trade (Screwfix) sales will likely suffer.
ABF – over the weekend the company took the decision to close all its 376 stores in 12 countries, which represents a loss of £650m per month. Primark cannot fall back on online sales. Management say they can recover about 50% of total operating costs though to mitigate. ABF’s other businesses have not suffered a material impact, whilst it has £800m of net cash at the half year, together with a revolving credit facility of £1.1bn, equating to total liquidity of £1.9bn.
ITV is pulling guidance. It had previously warned ad revenues in April would be down 10 per cent due to travel and tourism impact. However, the outlook seems to have deteriorated significantly in the last fortnight as government lockdowns have greatly extended the immediate near-term economic hit beyond airlines and package holiday companies. ITV has withdrawn market guidance for 2020 and is cancelling the 8p full year dividend for 2020, saving about £300m.
Shell is suspending its buyback programme and reckons net savings will deliver about $8bn-$9bn. The level of demand destruction in oil markets and the collapse in prices is going to require a complete strategic rethink. Pearson has also paused its buyback but is benefitting from a significant rise on online product - it could be a key moment in this division, albeit clearly there is an impact on its businesses that rely on learners and staff being able to access physical sites.
Neil Wilson is chief markets analyst at Markets.com
