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Market Outlook: Coronavirus outbreaks leave stocks stuck in their ranges, Costain, Lookers & more

London shares are struggling for direction in morning trading
June 29, 2020

Virus outbreaks in the US continue to weigh on the mood, as it suggests the run-up in stocks on hopes for a V-shaped economic recovery may be overly optimistic. Several states, mainly in the south, have been forced to re-impose lockdown restrictions after being the first to reopen. Dr Fauci described it as a ‘serious problem’. The dangers of reopening too quickly seem all too apparent, but investors are also keeping an eye on outbreaks in Tokyo, Australia and China. 

European equities were a touch softer but trading near the flatline on Monday morning, with a general lack of direction about today’s trade. Major indices tracking around the middle of their June ranges after Asian equities fell. US equities were lower Friday and finished down for the week but, as the month ends, stocks have enjoyed a very strong quarter. The FTSE 100 is up over 8 per cent quarter-to-date, while the S&P 500 has rallied over 16 per cent in Q2 and the DAX has surged 21 per cent. Valuations remain the concern as we head into earnings season with the S&P 500 still trading at more than 22x on a forward basis. 

UK Company Announcements

CompanyAnnouncement
Costain (COST)

The group has “mutually agreed” to exit its problematic contract to build two compressor stations for National Grid (NG.). Changes to the project's scope had pushed up planned costs by £90m and impacted the delivery schedule. This reduces but doesn’t eliminate the contract’s risk – broker Liberum notes National Grid could still claim back some costs.

Lookers (LOOK)

The car retailer's fraud investigation is expected to yield a non-cash write-off of around £4m along with £15m of adjustments relating to the incorrect application of accounting standards - Lookers shares are expected to be suspended with the retailer set to miss its 30 June deadline for finaling its accounts.

Avon Rubber (AVON)

The group has received an order under its M50 mask sustainment contract with the US Department of Defense worth $16.3m. Deliveries will commence in the current financial year, which runs to 30 September.

Grainger (GRI)

As part of plans to extend the average maturity of its debt, the group has has issued a £350m sterling-denominated senior secured bond at a coupon of 3 per cent for 10 years. Following February's equity raise, the private rental sector specialist repaid £200m in short term debt. May's rent collection was 96 per cent and occupancy was 97 per cent.

Morses Club (MCL) & Equals Group (EQLS)

The fallout from the suspension of Wirecard's operations in the UK continues today. Users of U Account, a banking app provided by Morses Club, can only access their balances, while Equals Group says "disruption is mainly limited" to its customer travel cards.

Energean (ENOG)

The Mediterranean gas developer has cut $466m (£377m) from the price of its Edison acquisition, after adjusting it for current low prices and removing the Norway asset, as flagged in May.

Draper Esprit (GROW)

Though its net asset value per share may have dipped by 3.4 per cent in the six months to March, full-year results for the venture capital firm suggest its portfolio companies are holding up well. Bailouts are lower than expected and liquidity has improved, suggesting that the group remains lowly-valued.

For more on the fallout for UK fintech companies from Wirecard's collapse, click here. 

Of course stocks haven’t only rallied because of reopening economies – enormous liquidity thanks to the coordinated action of central banks has been key. Central bankers have been striking similar notes in terms of the response to the crisis and Jerome Powell, the Federal Reserve chairman, will testify in Congress again this week. The Fed’s rather downbeat assessment of the economic recovery helped to stop the rally in its tracks and since then indices have been trading ranges. The US jobs report – on Thursday this week due to the July 4th holiday – will provide an important view on the pace of recovery, but we should note that the weekly unemployment claims numbers are proving a more sensitive and up-to-date barometer, not least since there are problems with the data gathering for the monthly nonfarms report. 

Facebook shares tumbled more than 8 per cent on Friday as a growing number of companies join a boycott of the platform over hate speech. We saw how a boycott of Facebook by users failed to move the needle on earnings, but this time it’s different – it's the big brands that pay the big bucks and the loss of Unilever, Starbucks, Coca-Cola, Levi’s and Diageo among others will create a headwind to revenue growth in the coming quarter. I would think Facebook can and will do a lot more and will be able to take steps to assuage brands’ concerns, allowing the stock to recover. Moreover, will brands be able to avoid Facebook for very long? Virtue signalling is one thing, but they also need to shift product. For our latest take on the Facebook boycott, click here

*For more on companies and virtue signalling, listen in to our Investment Hour podcast this week.*

Crude oil was steady with WTI (Aug) around $38 after rallying off the medium-term support around $37.50. OPEC+ compliance in June is expected to be higher than in May, mainly because Saudi Arabia, Oman, Kuwait and the UAE are cutting above their quotas. In FX, cable continues to track its channel lower with a new low put in at 1.2315, with the previous support in the 1.2390 region now acting as resistance. 

 

 

 

 

 

 

Neil Wilson is chief markets analyst at Markets.com