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Updated Market Outlook: Risk rolls over in early US trade, Rolls Royce, Persimmon & more

Sentiment crumbled as the day wore on
July 9, 2020

Updated 5pm

Risk appetite has well and truly rolled over. US stocks moved lower in the first hour of trade and continued to leg it south, while oil prices swan dived amid a very messy picture for global markets on Thursday afternoon. Walgreens Boots Alliance shares dragged on the Dow as the stock fell 9 per cent after reporting weaker-than-forecast earnings amid some serious weakness in the UK. The dollar found bid as risk appetite turned south, hurting FX majors like GBPUSD and EURUSD.

Risk sentiment was a bit shaky anyway but it seemed to take a hit as Donald Trump suffered a defeat at the hands of the Supreme Court – not his favourite institution of late. The Supreme Court ruled Donald Trump’s finances and tax returns are fair game and should be seen by the Grand Jury, but it threw out rulings that allowed 3 Democrat-led Congressional committees to obtain Trump’s financial records. This ruling relates to alleged hush money to women who have claimed to have had sexual relations with the president – a story Mr Trump said was irrelevant. That may be so, but his tax returns may interest voters. Whilst US legal proceedings are far from my area of expertise, I understand that if only the Grand Jury sees the documents it is very unlikely that they would become public records, which could have had serious repercussions for the election. Meanwhile Treasury Sec Steve Mnuchin was also on the wires, saying the Federal government would not bail out states that had been ‘mis-managed’.

As investors bailed on stocks, some were reaching for the insurance of gold - read Alex Hamer's analysis of whether gold is still worth buying at $1,800 an ounce. 

The move lower came despite some decent jobs numbers. Weekly initial jobless claims fell to 1.314m, better than the 1.375m expected and representing a decline of 99k from a week ago. Continuing claims fell to 18.06m, a drop of almost 700k and much better than the 18.9m expected. The previous week’s number was also revised down over half a million.  So, the picture in the US labour market is maybe not quite as bad as feared, but still horrendous. There is clearly a long way to go before getting back to pre-pandemic levels. Moreover, as the number of covid-19 cases rises across most US states, the numbers may well start to improve a slower rate.  

At send time indices were at session lows, making new lows for the week – we could see further declines as risk appetite appears to have rolled over today. As of send time the Dow was down over 1.8 per cent to 25,559 at the session low, whilst S&P 500 was down 1.5 per cent at a low of 3,120, making it down for the week. The dip on Wall Street added to pressure on European equities with the FTSE 100 down over 1.7 per cent to a low at 6,046, taking it negative for the week. Having been bid up on Monday towards the higher end of the recent ranges for little reason we are seeing indices pull back closer to the middle of the June ranges – no conviction trade yet.

Meanwhile, sterling eased back as risk appetite soured and Michel Barnier said talks this week confirm that significant divergences remain between the EU and the UK. Sterling pulled back from its highs at the top of the new bullish channel on the news as well as the general risk-off tone but remains in a solid uptrend with GBPUSD ably supported above 1.26. Elsewhere in FX the risk rollover boosted the USD so EURUSD pulled back under 1.13.

WTI (Aug) fell sharply from around $40.50 a low under $39.30 in a very swift and long-awaited reversal – albeit probably a day late given yesterday’s inventory build. Expectations of a slower reopening in a number of US states is a worry for near-term sentiment and I have been calling for a reversal based on the technical set-up, which could see a return to the neckline at $35. 

 

10AM

Caution is the order of the day. European stocks are mixed after falling for the second session in a row on Wednesday. Asian shares ticked up overnight, with China continuing to charge. Wall Street rose on Wednesday but overall the major indices are still well within their June trading ranges. In London, the domestically oriented small cap indices are proving popular while the FTSE100 was flat in early trading. 

UK Company Announcements

Rolls-Royce (RR.)

Widebody engine flying hours plunged by 50 per cent in the six months to 30 June, with a 75 per cent drop in the second quarter. There was a £3bn free cash outflow over the first half of the year and the group is guiding to a £4bn outflow in the second half.

Persimmon (PSN)

Sales prices for the 5,150 homes forward sold at the end of June was ahead of the same time the prior year, while the value of the forward order book was 15 per cent higher. However, lockdown caused revenues for the first six months of the year to be down around a third on the same time in 2019.

National Grid (NG.) and SSE (SSE)

Ofgem has released its draft determination for the next regulatory period running between 2021 and 2026, ahead of setting the final price controls in December. The allowed return on equity has dropped by almost 50 per cent to 3.95 per cent. National Grid says it is “extremely disappointed” with the plan, believing it fails to incentivise investment and protect consumers. SSE says it will "keep all options open” unless significant changes are made.

Grafton (GFTU)

Revenue from continuing operations for the six months to 30 June dropped by 19 per cent year-on-year to £1.06bn, although average daily like-for-like sales in June were only 1 per cent down on the prior year. The group has £658m of liquidity and paid pack £263m drawn from its revolving credit facility in April.

Robert Walters (RWA)

Gross profit dropped by just over a third at constant currencies to £71.1m in the three months to 30 June, with fairly uniform declines across all geographic regions. The group has reduced its cost base by 19 per cent and is sitting on £119m of net cash.

PageGroup (PAGE)

Gross profit tumbled by 48 per cent at constant currencies in the three months to 30 June, with a 42 per cent decline in it ‘large, high potential markets’ – Germany, Greater China, Latin America, South East Asia and the US. The group has £156m of net cash.

SIG (SHI)

The group received acceptances for 84 per cent of the 148m open offer shares available and the remaining shares have been allocated to the institutional investors with which they had been conditionally placed. The group has therefore raised its desired £44m.

Ceres Power (CWR)

Revenue for the year to 30 June is expected to come in 20-25 per cent ahead of last year at around £20m. Although Covid-19 disruption to the commissioning of its new Redhill facility means some revenues have been deferred into the current financial year.

DWF (DWF)

As activity levels improve, revenue across May and June has increased by 21 per cent year-on-year, with 6 per cent organic growth. Cash profits (Ebitda) are £3m ahead of the prior year. The group generated £7m of free cash flow during these two months.

Dechra (DHP)

Trading for the year to June was in line with management’s expectations, with revenues rising by 7 per cent at constant currencies. Analysts at Jefferies and Stifel had anticipated 9 per cent growth.

Vistry (VTY)

The average sales rate per site rose to 0.62 over the last four weeks, but said margins would be hit by lower levels of operational efficiency and longer development period expectations. The good news is that debt has come in lower than anticipated, falling to a net £355m. We stand behind our 'value buy' rating.

Advanced Medical Solutions (ADV)

As previously highlighted, Covid-19 disruption knocked second-quarter revenues by about £15m – meaning that half-year revenues are expected to come in at about £39m, down from £48.7m a year earlier.

Dart Group (DTG)

The group was hit by a net exceptional charge of £108.4m due to hedge ineffectiveness caused by coronavirus. The shares have shed more than half of their value since the beginning of 2020, following a significant climb in the final quarter of 2019.

     

Gold broke out to its highest level in nine years, breaking free from the $1,800 psychological resistance to clear $1818 at one point. The path is open to further gains, albeit we have just seen real interest rates come back in a touch. Nevertheless, the outlook for gold remains constructive – lower real yields, worries about inflation emerging down the line, and broader economic uncertainty all combine for a perfect environment for gold bugs. Remind yourself of why Chris Dillow thinks gold is useful protection for investors. 

 

Fed officials are increasingly sounding cautious. Richmond Fed President Thomas Barkin said whilst businesses might have had decent order books and pipelines of work to keep them going, new orders are not coming on stream fast enough. Fiscal payments are coming to an end and it is not clear what will replace them. The US may well need to extend and pretend. Boston Fed president Eric Rosengren said: ‘I do expect unfortunately that the economy is going to remain weaker than many had hoped through the summer and fall.’ US cases continue to soar, with the country again reporting its biggest one-day jump in cases, choking the reopening and recovery process at birth.  

The US weekly unemployment claims data will be closely watched following the big nonfarm payrolls report last week. Initial claims are seen at 1.375m, with key continuing claims down to 1.875m. Whilst these numbers have been coming down, they haven’t been contracting at a rate fast enough to warrant great optimism.  

Data from Japan at first looked encouraging but masked some nasty surprises. Core machinery orders, a volatile leading indicator of activity, rose 1.7 per cent in May after a 12 per cent drop in April, and ahead of the 5 per cent decline expected. However, the 17.7 per cent rise in orders for non-manufacturers was offset by a 15.5 per cent decline in manufacturers’ orders and 18.5 per cent drop in overseas orders.  

In FX, the dollar is being offered. GBPUSD cleared resistance and moved above 1.26. Resistance 1.2690, the Jun 16th swing high, is the next target for bulls. EURUSD has cleared 1.13 but pulled back sharply after running into resistance at 1.1370. Eurogroup members to vote on a new president today ahead of the key summit next week at which the EU needs to hammer out agreement on the €750bn rescue fund. 

Crude oil pushed higher before pulling back. WTI (Aug) moved above $41 but pared gains and traded around $40.70 at send time. The EIA said US crude inventories rose by 5.7m barrels vs expectations for a draw of around 3m barrels. But the data was not as bearish as it appeared at first glance – stockpiles were up largely on higher imports, whilst gasoline inventories fell by almost 5m barrels, a good sign Americans are back on the road. Refining activity rose to a 14-week high. 

 

 

Neil Wilson is chief markets analyst at Markets.com