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Market Outlook: Equities feel the hangover, JD Sports, Reach & more

London shares have given up some of their recent gains.
July 7, 2020

Equity markets look a tad bleary-eyed and hungover this morning after a bit of binge. Call it exuberance, but the strong rally in China stoked by the state-run press left markets with only way to travel on Monday and now the price has to be paid. Meanwhile we continue to monitor the rising cases in the US and an emerging spat between the UK and China over Hong Kong and Huawei which simply evinces the fact that Covid is reshaping the world.

European stocks handed back some of Monday’s gains on the open on Tuesday after the strong start to the trading week pushed the FTSE 100 back above 6200. Energy and financials led the fall but all Stoxx 600 sectors dropped in the first hour of trade. Tokyo and Hong Kong fell, but shares in China continued to rally on very high volumes.

UK Company Announcements

JD Sports (JD.)

The sports fashion retailer published its final results for its year ending 1 February 2020, in which pre-tax profits edged up 2.5 per cent. JD warned that customers have been nervous about entering stores since reopening.

Reach (RCH)

550 jobs, or 12 per cent of the workforce, will be cut as the newspaper publisher grapples with an acceleration of structural changes in the media sector

Halfords (HFD)

Halfords pre-tax profits plunged 55 per cent to £19.4m, with 2.3 per cent growth in cycling sales proving insufficient to offset an overall sales decline led by a slump in demand for motoring products.

Renewi (RWI)

The shares jumped by 7 per cent in early trading after the group revealed the Covid-19 hit to earnings in the three months to 30 June was €12m, lower than the €20m previously expected. ‘Core’ net debt has improved by a tenth since the March year-end to €413m, remaining below 3 times cash profits (Ebitda).

Polypipe (PLP)

Revenue in June was down 30 per cent year-on-year, improving from the 66 per cent shortfall seen in April. With the Covid-19 hit to construction activity, the group is now looking to trim 8 per cent of its workforce.

James Fisher (FSJ)

Revenue in the six months to 30 June dropped 10 per cent year-on-year thanks to the oil price crash. With subsea service projects delayed in the second quarter, the marine support business cost base is being trimmed and management restructured. Net debt has come down 14 per cent since the December year-end to £175m.

Whitbread (WTB)

Revenue in the 13 weeks to 28 May plunged by 79 per cent. All of the group’s German hotels are now up and running and 270 UK hotels have now reopened. The rest of the estate is expected to reopen throughout July.

RM (RM.)

Adjusted operating profits dropped by more than half in the first six months, as the education technology company was hurt by school closures and exam cancellations in the second quarter.

Micro Focus (MCRO)

The software company was hit by an impairment charge of $922.2m (£739m), pushing the group to a pre-tax loss of $1.04bn (£833m) in the first half.

Burford Capital (BUR)

The litigation finance group has filed with the US Securities and Exchange Commission (SEC) with a view to trading on a stateside stock exchange as well as its current UK listing.

Wall Street also rallied after the bump up in China, with the Nasdaq hitting a fresh all-time high, but yesterday had a feel of a frothy move based on nothing but fumes. The put/call ratio for the S&P 500, which reflects market positioning and sentiment, has fallen to levels that have in the past indicated a correction is in the offing. Speculators have also lately aggressively cut their net long positioning on S&P 500 futures. The upcoming earnings season will be crucial, and investors may see earnings estimates reduced given that many companies simply scrapped guidance, which could call for a rethink of valuations. Indices continue to track the ranges of June, so until we break out in either direction the pattern is one of a choppy but sideways market as investors try to figure out the balance on offer between reopening & stimulus vs cases & permanent economic damage from falling confidence and increased saving. 

*Find out what renowned short seller Carson Block thinks of the current markets in the first of our IC Interviews free podcast series.*

Recovery is happening, but is it fast enough: German industrial production rose 7.8 per cent in May, but the figure was short of the 11 per cent that was expected. Meanwhile, BMW Q2 sales in China rose from the same period a year ago, which might be down to the pent-up demand from the shutdown in the country in Q1, but nevertheless indicates a decent pace of recovery in the world’s second largest economy. 

The UK’s Halifax mortgage survey showed prices fell for a fourth month in a row in June, but activity levels are rebounding, with enquiries up 100 per cent from May. It’s too early to tell if this rebound can be sustained - a truism across the economic data prints we see right now. 

Meanwhile we got another dose of salt from Raphael Bostic, the Atlanta Fed president, who warned of signs the US recovery is levelling off. Indeed, the headline nonfarm payrolls number last Thursday masks a lot of ills. Not least of which, permanent job losses are on the rise: while the number of unemployed classed as being on temporary layoff decreased by 4.8m in June to 10.6m, following a decline of 2.7m in May, the number of permanent job losers continued to rise, increasing by 588,000 to 2.9m in June. Additionally, the data for the June report was collected largely before the spike in cases in several of the big economically important states like Texas and California. Dr Fauci said the US is still ‘knee-deep’ in the first wave. 

The Reserve Bank of Australia left interest rates on hold at the record low 0.25 per cent, but noted households and businesses are worried about the state of the economy after the jump in cases in Victoria raised doubts about the country’s handling of the outbreak, which had been assumed to be as good as New Zealand. “The downturn has been less severe than earlier expected,” RBA governor Philip Lowe said in a statement, but added that “uncertainty about the health situation and the future strength of the economy is making many households and businesses cautious, and this is affecting consumption and investment plans”. Scott Morrison’s government will deliver a statement on July 23rd outlining further support on the fiscal side. 

Elsewhere, gold’s bullish bias remains intact as it consolidates around $1780 and may be preparing for a fresh run towards $1800 – first up it needs to clear the seven-year highs at $1789. WTI (Aug) is steady at $40 for now and in FX we see the majors still trading within recent ranges as the dollar recovers a little from Monday’s risk-on sell-off. EURUSD failed to break the June swing high at 1.1345 yesterday and has pulled back towards the middle of the bullish pennant. GBPUSD has also drifted lower after several failed attempts in the last session to clear the 1.2520 resistance, finding some immediate support on the 200-period SMA on the 4-hr chart. Sterling has that RoRo feel.

 

 

Neil Wilson is chief markets analyst at Markets.com