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Market Outlook: Stocks steady after Q2 boom, gold breaks higher, Sainsbury, SSP & more

Shares are little moved in early trading despite signs of virus resurgence in the US
July 1, 2020

The S&P rallied 1.5 per cent to finish the quarter up 20 per cent, its best quarter since 1998 and keeping its YTD losses at –4 per cent. The Dow Jones industrial average closed up 200pts as it continued its bounce off the 50-day simple moving average to notch its best quarter since 1987. Things were a little more mixed in Europe but again we saw the major bourses finish their best quarter in years.

Stocks rallied so sharply in Q2 for a number of reasons – chiefly stimulus, both fiscal and monetary, as well as the reopening of economies and better virus rates in most countries, though this trend has somewhat come undone in the US in the last couple of weeks. The aggressive pullback in February and March also left stocks rather oversold on a short-term basis, when considering the stimulus and relative yields to government bonds. Meanwhile hopes of a vaccine are central if we are to see 2021 look more like 2019 than this year. For gains to be sustained in Q3 stocks require the continued support of stimulus, which remains on tap, as well as a better outlook on the virus spread and for the hard economic data to show a strong bounce from Q2, both of which could be more tricky.  

Boeing declined by more than 5 per cent as Norwegian Air cancelled an order for almost one hundred jets and competitor Airbus announced it would cut its workforce by 15,000, whilst Tesla shot 7 per cent higher to a new record that takes its market capitalisation to $200bn for the first time. Shares in Facebook, which has come under fire lately by showboating big brands who are pulling advertising temporarily, rallied 3 per cent. Read our analysis of the advertiser boycott at Facebook. 

Protests in Hong Kong signal geopolitical stress – Western powers have expressed dismay at China’s decision to pass the new national security law. The first arrests under the new law have been made – only a few hours after its imposition. The potential for this to create further unrest in Hong Kong and stoke US-China tensions will need to be monitored. 

European equities traded cautiously on the first day of July and the third quarter after a mixed bag from Asia as Tokyo fell and Chinese bourses rallied. Australia was also higher as Hong Kong was shut for a holiday. The major indices remain in a broad zone between the 38.2 per cent and 61.8 per cent retracement of the drawdown in the second week of June. 

UK Company Announcements

J Sainsbury (SBRY)

A first quarter trading update left the supermarket group's expectation of a blow of more than £500m to underlying pre-tax profits unchanged since its April results release. Excluding fuel, retail sales rose 8.5 per cent, with digital sales more than doubling.

SSP (SSPG)

SSP warned that it could slash around 5,000 UK jobs, with UK rail passengers numbers remaining 85 per cent down and air travel expected to remain subdued. Sales were down 90 per cent in June, compared with forecasts anticipating second half revenues dropping 80 to 85 per cent.

British Land (BLND) and Hammerson (HMSO)

Following the third quarter rental collection date on 24 June, British Land reported that it had collected 88 per cent of the rent due for offices and just 36 per cent for retail. However, Hammerson received just 16 per cent of UK rent due, announcing that it had secured a relaxtion of its unencumbered asset ratio - the most sensitive metric to valuation declines - until December 2021. Until June 2021 unencumbered assets should not be less than 125 per cent of unsecured borrowings, rising to 140 per cent in October.

Provident Financial (PFG)

Hamish Paton - whose tenure as chief executive of Amigo last year coincided with a 60 per cent drop in the guarantor loan firm's share price - is to head up Provident's struggling consumer credit division. Mr Paton previously worked for more than a decade at the now-bankrupt Brighthouse, during which time the rent-to-own lender was fined for irresponsible lending by the FCA.

Liontrust Asset Managament (LIO)

In a cash-and-shares deal worth up to £75m, the high-growth investment manager is to acquire Architas, the multi-manager fund group owned by AXA. The purchase will lead to a near seven-fold increase in Liontrust's multi-asset multi-manager assets under management, and take total AuMA to £25bn.

Smith & Nephew (SN.)

Second-quarter underlying revenues should show a decline of around 29 per cent, in line with previous guidance for the period to be significantly down year-over-year. But the medical technology group’s performance improved as the quarter progressed.

Indivior (INDV)

Former chief executive Shaun Thaxter, who stepped down on Monday, has pleaded guilty to a US charge pertaining to the marketing of opioid addiction treatment Suboxone. Indivior continues to attempt to resolve its own litigations “as expeditiously as possible”.

Meggitt (MGGT)

Meggitt Training Systems has been sold to US private equity group Pine Island Capital Partners for $146m (£118m). The proceeds will be used for general corporate purposes and to strengthen liquidity.

Kier (KIE)

The group is guiding that average month-end net debt for the year ending 30 June will be around £440m, up from £395m at the half year stage. Its lending covenants for the 30 June test date have been waived and it is considering an equity issue to raise funds.

Babcock (BAB)

Former Cobham chief executive David Lockwood has been appointed in the same role at Babcock. He will take up post on 14 September, replacing Archie Bethel who announced his intention to retire earlier this year.

Despite the sharp rise in cases in the US, which Dr Fauci says is out of control, Americans’ confidence is returning. The Conference Board’s index jumped by 12.2 points to 98.1, the best one-month rise in nine years. Chinese data was a little better than expected as the Caixin manufacturing PMI hit 51.2, but the Japanese Tankan survey disappointed at –34. Data points will remain mixed and noisy as we exit the crisis. PMIs, which are diffusion indices, are particularly challenged by the speed and magnitude of the economic contraction. I would prefer to look at the hard data as it comes out over the third quarter. Economically things have rarely been this uncertain – we could be running way hotter than we think, but equally the long-term consequences could be deeper and longer-lasting than the V-shaped recovery camp would have it

Looking ahead to today’s session, the ADP nonfarm employment report will provide a taster for Thursday’s BLS nonfarms report, while we will also be looking to the FOMC meeting minutes later for clues as to what else the Fed might be up to – there is unlikely to be anything other than ‘do whatever it takes’ mode on offer.

Gold prices rallied to fresh 8-year highs near $1790 on a technical breakout from the bullish flag formation. Real US rates remain at 7-year lows, while benchmark 3yr, 5yr and 7yr Treasury yields notched record low closes. As expressed in recent notes, gold looks to be a long-term winner from the pandemic as social and economic uncertainty favours the safe haven, whilst the vast increase in M1 and M2 money means there is a high chance – though not a certainty – of an inflation surge. Fading momentum on the CCI with a bearish divergence to the price action suggests a near-term pullback may be required - perhaps at the $1800 round number resistance - before the next significant leg higher can be made.

 

The rally on Wall Street upset the emerging downtrend and reasserted the range trade for the time being, with the S&P 500 finishing at 3100 in the 50 per cent area of the June pullback.

 

 

In FX, cable bounced sharply off the 1.2250 support on the second look but remains constrained by the upper end of the channel.

 

 

 

Neil Wilson is chief markets analyst at Markets.com