Equity markets have come under pressure again as a spike in new Covid cases across the US has investors worried, whilst the IMF drastically cut its growth forecasts for the year. Major equity indices have retreated towards the lower end of the range traded in June but have yet to make fresh lows for the month – when they do it will get very interesting and could call for another leg lower. Stocks in Europe were down 3 per cent on Wednesday, whilst Wall Street dropped 2.6 per cent. European markets opened lower again Thursday, with a risk-off trade seeing all sectors in the red at the open and telcos, healthcare and utilities declining the least. By 9am the major indices had pulled off the lows and the DAX was a shade positive.
Investors are pulling their heads in a little as the surge in cases raises concerns about how quickly the US economy can emerge from the ashes. There are also clusters in Germany of course but the focus is on the divergence between the European and US experience. The FTSE 100 retreated close to 6,000 round number but found support around the 23.6 per cent retracement at 6,066. The S&P 500 closed at 3,050, on the 38.2 per cent retracement. With softness on the open in Europe and futures indicating a lower open, we may see SPX test its 23.6 per cent level on the 3,000 round number. A retest of the June lows looks increasingly likely.
Meanwhile the IMF lowered its 2020 outlook, warning the global economy would shrink a lot more this year than it had forecast in April. Global output is forecast at –4.9 per cent vs –3 per cent in April. The UK and EU will decline 10 per cent, whilst the US economy will shrink 8 per cent. Tellingly, the IMF also lowered its 2021 bounce-back forecast – growth globally is expected to rally 5.4 per cent, vs the 5.8 per cent forecast in April. In other words, the decline will be deeper and the recovery slower; that is, no V-shaped recovery. We can also add US-EU trade tensions into the mix hitting stock market sentiment, as the White House has threatened fresh tariffs. I’d also suggest that the closer we get to the election and the more polls show Biden leading Trump, the greater the risk of a Democrat clean sweep, which will need to be priced into equity markets.
Although we see clear headline risk around spikes in Covid cases for equity markets, any second wave is not going to result in the same level of lockdown restrictions endured in the first wave: it’s just too costly economically and because we have learned a lot in how to cope with this virus, both in terms of treatment and prevention. This means any further pullback we see, whilst potentially quite sharp, is unlikely to see a retest of the lows in March. Meanwhile, central bank stimulus is still strong. The Fed has shifted materially – it now has a $7tn balance sheet, setting a floor under the bond market that pushes up equities. The risk to equities comes later in the year when we get a real insight into both the pace of economic recovery and, by extension, corporate earnings – does the S&P 500 still justify x23 forward PE, or should it start to trade at more like x19? The current forward PE of around x23 suggests hope of a bounce back in earnings next year that may not come to fruition.
On the pace of economic recovery, today’s weekly jobless claims report will be of great significance. Last week’s data underwhelmed. Following the surprisingly strong nonfarm payrolls report, the weekly numbers didn’t follow through with conviction – initial claims were down just 58k to 1.5m, whilst continuing claims only fell by 62k to 20.5m. The slowing in the rate of change was the main concern – hiring not really outpacing firing at a fast-enough pace to be confident of a decent recovery. I would like to see a greater improvement given the reopening of businesses, and it suggests more permanent scarring to the labour market.
UK Company Announcements
| Company | |
| Mitie (MTO) | The group will acquire Interserve Facilities Management for a total consideration of £271m, supported by a £201m rights issue. Operating profit was up 8 per cent to £86.1m in 2019/20. |
| Capita (CPI) | Revenue for the six months to 30 June is expected to be 10 lower than a year earlier, reflecting a 5 per cent Covid-19 headwind and previous contract losses. It is guiding to £640m of liquidity at the end of the month, benefitting from the sale of Eclipse Legal Systems. |
| QinetiQ (QQ.) | The group is to sell its data classification and secure messaging business, Boldon James Limited, to HelpSystems International for £30m. The disposal reflects the group’s strategy to focus on its core capabilities to deliver “mission-led innovation”. |
| Stobart (STOB) | The group has raised its desired £20m from an open offer. It received acceptances for 56.4 per cent of the 50m open offer shares available and remainder will go to the institutional investors with whom the open offer shares had been conditionally placed. |
| BAE Systems (BA.) | Revenue for the six months to 30 June is expected to be stable year-on-year, but profit is guided to be 15 per cent lower. Covid-19 has disrupted cost recoveries and reduced volumes in higher margin commercial work. The group expects a stronger second half performance. |
| Auto Trader (AUTO) | After a period of reduced revenues during which the group supported its customers, it now plans to return to full rates from 1 July. Operating profit grew by 6 per cent to £258.9 million in 2020. |
| Batm Advanced Communications (BVC) | As a result of the growth in its Bio-Medical division, BATM now expects to report at least a 25 per cent rise in revenues in 2020. |
| London Stock Exchange (LSE) | Johnson Matthey finance head Anna Manz will move to the financial markets group as its new CFO in November. Incumbent David Warren will continue to work until June 2021 "to ensure a seamless transition" - likely involving the protracted acquisition of Refinitiv. |
| XPS Pensions (XPS) | Adjusted full-year earnings of 9.6p per share are in line with market expectations, and the pensions advisory group is confident of withstanding any Covid-19 related headwinds. To that end, management has approved a 4.3p final dividend. |
| Quilter (QLT) | Can large corporates be trusted to buy their own shares at the right time? The wealth manager's purchase of £50m shares between March and May - at an average 116p per share - suggests they can, and explains why a fresh £75m buyback programme has just been signed off. |
| Hutchison China MediTech (HCM) | Private-equity firm General Atlantic is buying a stake in the group for $100m, at a price equal to $25 per American Depositary Share (ADS). This could rise to $200m, through an 18-month term warrant. |
| Unite (UTG) | New shares equivalent to 9.5 per cent of the student landlord's outstanding share capital will be placed, raising around £300m. The proceeds will be used to invest in three schemes that are under offer and invest in new partnerships in a variety of university cities. Reservations for the 2020/21 academic year are running at 80 per cent of capacity. We remain cautous. |
| Royal Mail (RMG) | The group produced adjusted operating profit of £325m in the year to 31 March, meeting its £300m-£340m guidance. But statutory operating profit dropped from £160m to £55m, weighed down by exceptional charges. It is now looking to save £330m of costs over the next two years. |
Gold eased back off 8-year highs as the US dollar gained on the risk-off trade, but at $1765 in early European trade had bounced off lows around $1753 struck overnight. Short-term we see a stronger dollar exerting some pressure on gold prices; longer term the focus is on US real rates, which have just risen a touch off the lows. 10yr Treasury Inflation Protected Securities (TIPS) eased away from 7-year lows at –0.66 to –0.64, providing another little headwind to gold prices in the near term.
Crude oil declined with the broader risk-off trade. Rising US stockpiles – which hit a record high for the straight week – have also started to spook traders. Crude inventories climbed 1.44m barrels in the week to June 19th, to 540.7 million barrels. Gasoline stocks were down 1.7m barrels, giving encouraging signals about driving demand. US crude oil refinery inputs rose 239,000 bpd to 13.8m bpd. Total US production rose 500,000 bpd to 11m bpd due to the return of Gulf of Mexico output following Tropical Storm Cristobal. WTI (Aug) retreated off the $40 level to trade just above $37 – as suggested whilst the fundamentals have started to build in favour of stronger pricing, the market will not be immune to a technical pullback on overbought conditions and/or a decline in sentiment among traders due to rising US cases. The emerging double top is less nascent than it was and increasingly calls for the $35 neckline to be touched. A breach here calls for $31.50, the swing lows touched in the second half of May.
In FX, we can see a downwards channel for GBPUSD. The cross has pulled back to 1.24 as the dollar found bid, before paring losses a little this morning. Bulls need to clear the swing high at 1.2540 to break the downtrend, but trend resistance appears around 1.25 first. Bears can eye a pullback to under the Jun 21st low around 1.2334, with the channel suggesting we may see a 1.22 handle should the bulls fail to break 1.25 next.
Neil Wilson is chief markets analyst at Markets.com
