Time to dig in for the fight. Usually, at least for the last decade, a dovish Federal Reserve would help boost risk sentiment. But we are in different times and however accommodative monetary policy remains, the market needs a lot more, like a patient hooked on painkillers. Whilst the Fed last night committed to keeping rates at zero all the way through 2022, stocks (excluding the Covid-immune tech sector) are selling off.
The Fed’s extremely downbeat assessment of the US economy and jobs market, combined with expectations for a slow recovery, left risk assets looking very exposed after a big run up last week. Stocks in Europe slipped up ahead of the meeting and have extended losses today with the major bourses down more than 2 per cent again. Asian shares fell and Wall Street closed in the red, although the Nasdaq managed to secure another record closing high above 10,000. US Treasury yields sank partly on the commitment on keeping rates down but also because investors see a slower recovery taking place and lasting damage to the economy. Gold rallied to $1740.
Assessments for the economy are grim. The Fed forecast the US economy to contract by 6.5 per cent this year and for the unemployment rate to be above 9% by the end of the year. This would be an improvement from the current rate of 13.3 per cent, but it points towards a very slow recovery. Indeed, unemployment is still seen at 6.5 per cent through 2021. Faced with this, Jay Powell, the Fed chairman, said he is “not even thinking about thinking about raising rates”. And as many have warned, some of the damage will be permanent, meaning significant lost productivity. Powell said: “My assumption is there will be a significant chunk…millions…who don’t go back to their old jobs.” The V-shaped recovery theory died last night with the Fed.
Gloomy forecasts from the Fed chime with the OECD’s downbeat outlook. It said the UK economy will contract 11.5 per cent this year even without a second wave. And second wave worries are another factor dragging down on stocks, particularly as we see rising numbers of Covid cases in several US states like Texas, Florida and California, where hospitalisations are at their highest since May 13th after rising for nine of the last ten days.
Really the market got too far ahead of itself and is reacting to the Fed’s gloomy outlook and fears of a second wave of infections. We will get more indications about the pace of hiring vs firing today with the US initial and continuing jobless claims number.
Today’s market moves show the reopening trade unwinding in the wake of the Fed. Carnival and IAG led the losers on the FTSE 100 whilst only Polymetal, Fresnillo and Unilever were higher. European travel & leisure shares fell 5 per cent, with automakers and banks down 4 per cent. The S&P 500 is likely to open weaker after sliding 0.5 per cent yesterday to close under 3200 at 3190. Ocado shares fell 6 per cent after announcing a £657m share placing and that it would raise a further £350m by way of a convertible bond. Whilst shares are lower, this is about raising cash to grow, possibly transformational growth. This is what Amazon would do.
UK Company announcements
| Company | Announcement |
| CMC Markets (CMCX) | A surge in revenues and profits in the year to March has led management to recommend an 18-fold increase in the final dividend. What looked at the half-year like a bounce back now resembles a colossal rebound. |
| Ocado (OCDO) | The online grocer has raised £1bn from a share placing and the issuance of convertible bonds, as Ocado seeks to capitalise on what it views as an acceleration towards greater online grocery sales penetration. |
| Just Eat Takeaway (JET) | The platform has agreed to buy US outfit Grubhub in a deal worth $7.3bn, claiming that the deal will make it the world's largest online food delivery business outside of China. |
| BHP (BHP) | After seeing Rio Tinto (RIO) torch its reputation in Australia by blowing up a sacred Aboriginal site, the fellow Anglo-Australian miner has halted work at the South Flank mine in the Pilbara that would have destroyed 40 sacred sites. |
| Babcock (BAB) | The group swung from a £235m statutory pre-tax profit to a £178m loss in the year to 31 March, weighed down by £503m in exceptional charges. Underlying operating profit dropped 11 per cent to £524m, falling short of the £540m guided thanks to Covid-19. |
| Centrica (CNA) | A “significant restructure” is planned from the second half of this year with fewer customer-facing business units and management layers. Looking to accelerate cost savings, the 5,000 job cuts are said to largely relate to management positions. |
| Grafton (GFTU) | Revenue from continuing operations declined by over a quarter in the five months to 31 May, with a 38 per cent drop in May alone. Most branches have now reopened. Excluding lease liabilities, the group has £38m of net debt and £578m of liquidity. |
| Johnson Matthey (JMAT) | Covid-19 knocked £60m off the specialty chemicals group's 2020 operating profit, which was £529m. The company also announced 2,500 workers will lose their jobs over three years a new cost-cutting plan. |
| Urban and Civic (UANC) | Recorded the highest large site discount - calculated by applying a wholesale discount to the open-market value of its standard residential land - ever for the six months to March, reflecting caution regarding the future value of land purchased by housebuilders. That is a reversal of the trend enjoyed during the year to September last year. |
| TalkTalk (TALK) | Reported a 9.7 per cent rise in its headline adjusted cash profits to £260m in 2020, supported by growth in its fibre customer base. The group has maintained its final dividend at 1.5 pence. |
Tesla led the tech sector and Nasdaq higher, as shares rose 9 per cent yesterday to close above $1,025. The leg up came after Elon Musk said the company would ramp production of the Tesla Semi, its electric freight truck.
In FX, the dollar is finding bid as risk sentiment sours. GBPUSD has moved back to test 1.2650, having spiked as high as 1.28 yesterday. The pound is now very much a RoRo currency – risk-on, risk-off.
Copper prices fell having rallied for the last few sessions on fears of a slow economic recovery. Oil was holding losses as it hit around $38 for WTI after a surprise rise in US crude stocks combined with the hit to risk sentiment. EIA figures showed crude oil inventories rose 5.7m barrels vs expectations for a 1.45m drawdown.
Sellers return: S&P 500 in retreat, next leg lower to 2975?
Ex-dividend factors clip 5.5 points from the FTSE 100,4 from the FTSE 250:
3i Group | 17.5p |
AFH Financial | 3.00p |
Assura | 0.71p |
Charles Stanley | 6.00p |
Frenkel Topping | 1.03p |
Henry Boot | 1.30p |
Impax A.M | 1.80p |
London Security | 0.20p |
Phoenix Spree | 4.40p |
Severn Trent | 60.05p |
Sopheon | 3.25p |
Vodafone | 0.045c |
Warehouse Reit | 1.60p |
Neil Wilson is chief markets analyst at Markets.com
