A rolling back of the reopening process in California and rising US-China tensions left Wall St and Asian markets weaker, with stocks in Europe following their lead as surprisingly good Chinese trade data was not enough to calm markets.
European equity indices fell back in early trade on Tuesday after stocks on Wall Street suffered a stunning reversal late in yesterday’s session. At one point the S&P 500 touched its highest since level since the end of February at 3,235 before sellers sold hard into that level and we saw a very sharp pullback to 3,155 at stumps. After threatening to break free from the Jun-Jul trading range, the fact the S&P was unable to make good on its promise could signal fresh concerns about the pandemic but also investor caution as we head into earnings season – the fact is the market should not be up for the year. Although it’s hard to get a real feel for valuations because so many companies scrapped earnings guidance, the S&P 500 is trading on a forward PE multiple that is way too optimistic, you would feel. Earnings season gets underway properly today with JPMorgan and Wells Fargo.
UK Company Announcements
| Fevertree (FEVR) | UK and US off-trade sales grew well during the 12 weeks to mid-June. But Southern Europe is more reliant on the on-trade and here, some importers destocked intensifying uncertainty – impacting overall European sales. |
| Clinigen (CLIN) | Revenues for the half-year to June should show an increase of at least 17 per cent, with gross profits up by at least a fifth. Management pointed to a “robust performance” despite the circumstances. |
| DFS (DFS) | A pre-tax losses of between £56m and £58m is expected for the year to 28 June, following a pause in deliveries to comply with lockdown regulations. However, order intake since showrooms reopened is up 69 per cent year-on-year, which the retailer hopes will deliver an incremental revenue benefit of £100m during the first half of the current financial year. |
| Arbuthnot (ARBB) | The loan book may have grown by more than a quarter during the first-half but the Bank of England's base rate reduction cost the challenger bank £2.7m in revenue. A sharp drop in rental income received from investment properties also meant the group's pre-tax profits fell to just £0.2m, from £2.9m the prior year. No interim dividend was declared, in line with guidance from the Prudential Regulation Authority. |
| Ashmore (ASHM) | Investors pulled a net $2.2bn in funds from the emerging markets specialist during the second quarter, although a recovery in investment performance meant assets under management were up 9 per cent on the end of March to $83.6bn, as fiscal and monetary stimulus increased investors' risk appetite. |
| Halma (HLMA) | Revenue from continuing operations rose by 11 per cent to a record £1.34bn in the year to 31 March. Adjusted pre-tax profit came in at £267m, within the group’s guided £265m-270m range. The final dividend has been lifted by 3.8 per cent, marking the 41st consecutive year of dividend growth. |
| QinetiQ (QQ.) | The group has signed an agreement with the US Defense Counterintelligence and Security Agency (DCSA) allowing it to bring all of its US defence and security operations under a single entity. This will allow greater collaboration across its US businesses. It has also acquired software development and data analytics company Naimuri for £25m. |
The Nasdaq also slipped 2 per cent as tech stocks rolled over, with profit-taking a possible explanation after a) a very strong run for the market has left prices very high and, b) signs of a pullback for the broader market indicated now might be a good time to take stock. Tesla rode a $200 range in a wild day of trading that saw the stock open at $1,659, rally to $1,795 and close down 3 per cent at $1,497. Read Mark Robinson's Taking Stock on Tesla's share price surge here.
California’s economy is larger than that of the UK or France, so when Governor Gavin Newsom rolled back the reopening of the state on Monday, investors took notice. The closure of bars, barbers and cinemas among other business venues followed moves in economically important states like Texas, Florida and elsewhere, indicating the rate of change in the recovery is not going to improve. Whilst the market had developed a degree of immunity to case numbers rising, it is susceptible to signs that the economic recovery will be a lot slower than the rally for stocks in the last three months suggests.
Overnight Chinese trade data surprised to the upside with exports up 0.5 per cent in June and imports rising 2.7 per cent, beating expectations for a decline and signalling that domestic demand is holding up well. Singapore’s economy plunged into a recession with a 41.2 per cent drop in GDP, while Japan’s industrial production figures were revised lower. Tensions between the US and China took another sour turn as the White House rejected China’s claims to islands in the South China Sea, which aligns the US with a UN ruling in 2016. It had previously declined to take sides – the move indicates Washington’s displeasure and willingness to go up against China on multiple fronts now.
The UK is already seeing what a non-V recovery looks like. GDP growth rebounded 1.8 per cent in May, which was well short of the 5.5 per cent expected. In the three months to May, the economy contracted by 19.1 per cent. Some of the numbers are truly horrendous and it’s hard to see how the economy can deliver the +20 per cent rebound required to get back to 2019 with confidence sapped like it is and unemployment set to rise sharply. UK retail sales rose 10.9 per cent in June on a like for like basis excluding temporarily closed stores, whilst overall sales rose a more modest 3.4 per cent and non-food sales in stores were down a whopping 46.8 per cent for the quarter. Suffice to say that headlines of rebounds mask many ills.
Sterling extended a selloff after the GDP numbers disappointed. The reversal in risk appetite late yesterday saw GBPUSD break down through the channel support and this move has continued to build momentum overnight and into the European morning session. The rejection of the 1.2667 region seems to have made the near-term top for the rally. The 38.2 per cent retrace line at 1.250 may offer support before the old 50 per cent retracement level at 1.2464.
WTI (Aug) was a little softer under $40 as market participants eye the OPEC+ JMMC meeting on Wednesday. This will decide whether to roll back some of the 9.6m barrels or so in production cuts by the cartel and allies. The risk is that if OPEC acts too earnestly to raise production again the market could swiftly tip back into oversupply should the economic recovery globally fail to build the momentum required. Another factor to consider is whether giving the green light to up production is taken by some members as an excuse to open the taps again and result in more production than agreed – compliance remains the ever-present risk for any OPEC deal.
Neil Wilson is chief markets analyst at Markets.com
