European markets moved up again this morning after stocks rallied on Wall Street and futures indicate further gains for US equity markets despite big bank earnings underlining the problems on Main Street. Sentiment recovered somewhat after Moderna’s vaccine candidate showed ‘promising’ results from phase 1 trials. It is too early to call a significant breakthrough, but it’s certainly encouraging.
Cyclical components led the way for the Dow with top performers the likes of Caterpillar and Boeing, as well as energy names Exxon and Chevron up over 3 per cent as the index rose over 500pts, or 2.1 per cent, its best day in over two weeks. Apple shares regained some ground to $388 ahead of an EU court ruling today on whether the company should repay €13bn in unpaid taxes. Asian markets were mixed, with China and Hong Kong lower as US-China tensions rose, but shares in Japan and Australia were higher. European shares advanced around 0.75 per cent in early trade, with the FTSE reclaiming 6,200 and the DAX near 12,800.
UK Company Announcements
| Asos (ASC) | Sales were up 9 per cent at constant currency rates during the four months to the end of June but that compared with a 16 per cent growth rate over the 10 months since August. The fast fashion retailer said average sales prices were driven down by "'lockdown' product mix and limited demand for occasion wear". |
| Dunelm (DNLM) | Sales for the financial year ending 27 June were down 3.9 per cent on 2019 and pre-tax profits are now expected to be between £105m and £110m, down on £126m the prior year. The retailer also said it expects to incur £8m in costs associated with upgrading its digital capabilities during FY21. |
| Galliford Try (GFRD) | Site closures and lower productivity during lockdown, as well as the cost of implementing social distancing, has led to a “material reduction” in the gross margin in the year to 30 June. The order book has held steady at £3.2bn since the half year stage, providing visibility over 90 per cent of revenue in the new financial year. |
| Severn Trent (SVT) | The group continues to expect a £50m-£85m hit to revenue this year from Covid-19 which the regulatory model will allow it to recover in future. While cash collections are in line with last year, it also still anticipates bad debts will increase. Severn has access to £1.1bn of undrawn committed facilities. |
| BATM Advanced Communications (BVC) | Shares were up as much as 4.8 per cent in morning trading, following the news that the group’s biomedical division will launch three new diagnostic kits for Covid-19 and other respiratory illnesses. |
| McCarthy & Stone (MCS) | The retirement home provider reported a 44 per cent decline in legal completions during the first half, but said the worst of the financial impact of the pandemic would be weighted towards the second half of the year. Management hopes cost saving measures, including reducing sales and marketing spend, will net £4m annually. It follows a disappointing period of trading last year that prompted a strategic review. |
However, Tuesday’s reversal off the June peak may still be important – lots of things need to go right to extend the rally and you must believe this reporting season will not be full of good news, albeit EPS estimates – such as they are - may be relatively easy to beat. My sense is that while the stock market does not reflect the real economy, this does not mean we are about to see a major drawdown again like we saw in March. The vast amount of liquidity that has been injected into the financial system by central banks and the fiscal splurge will keep stocks supported – the cash needs to find a home somewhere and bonds offer nothing. It will likely take a significant escalation in cases – a major second wave in the winter perhaps – to see us look again at the lows. For the time being major indices are still chopping around the Jun-Jul ranges, albeit the S&P 500 and DAX are near their tops. Failure to breakout for a second time will raise the risk of a bigger near-term pullback, at least back to the 50 per cent retracement of June’s top-to-bottom move in the second week of that month.
US bank earnings highlighted the divergence between the stock market and the real economy. JPMorgan and Citigroup posted strong trading revenues from their investment bank divisions but had to significantly increase loan loss provisions at their consumer banks. Wells Fargo – which does have the investment banking arm to lean on – increased credit loss provisions in the quarter to $9.5bn from $4bn in Q1, vs expectations of about $5bn. This begs the question of when the credit losses from bad corporate and personal debt starts to catch up with the broader market. Moreover, investors need to ask whether the exceptional trading revenues are all that sustainable. Shares in Citigroup and Wells Fargo fell around 4 per cent, whilst JPMorgan edged out a small gain. Goldman Sachs, BNY Mellon and US Bancorp report today along with Dow component UnitedHealth.
In the UK, retail earnings continue to look exceptionally bleak. Burberry reported a drop in sales of 45 per cent in the first quarter, with demand down 20 per cent in June. Asia is doing OK, but the loss of tourist euros in Europe left EMEIA revenues down 75 per cent as rich tourists stayed clear of stores because of lockdown. Sales in the Americas were down 70 per cent but there is a slight pickup being seen. Encouragingly, mainland China grew mid-teens in Q1 but grew ahead of the January pre COVID level of 30 per cent in June, Burberry said. Shares opened down 5 per cent. Dixons Carphone reported a sharp fall in adjusted profit to £166m from £339m a year before, with a statutory loss of £140m reflecting the cost of closing Carphone stores. Electricals is solid and online sales are performing well, with the +22 per cent rise in this sector including +166 per cent in April. Whilst Dixons appears to have done well in mitigating the Covid damage by a good online presence, the Mobile division, which was already impaired, continues to drag. Looking ahead, Dixons says total positive cashflow from Mobile will be lower than the previous guidance of about £200m, in the range of £125m-£175m. Shares fell 6 per cent in early trade.
US-China tensions are not getting any better – Donald Trump signed a law that will allow the US to impose sanctions on Chinese officials in retaliation for the Hong Kong security law. The White House has also ended the territory’s special trade status – it is now in the eyes of the US and much of the west, no different to rest of China. This is a sad reflection of where things have gone in the 20+ years since the handover. Britain’s decision to strip Huawei from its telecoms networks reflects a simple realpolitik choice and underscores the years of globalisation are over as east and west cleave in two.
The Bank of Japan left policy on hold but lowered its growth outlook. The forecast range by BoJ board members ranged from -4.5 per cent to -5.7 per cent, worse than the April range of -3 per cent and –5 per cent. It signals the pace of recovery in Japan and elsewhere is slower than anticipated.
Federal Reserve Governor Lael Brainard talked up more stimulus and suggested stricter forward guidance would be effective – even indicating that the central bank could look at yield curve control – setting targets for short- and medium-term yields in order to underpin their forward guidance.
In FX, we are seeing the dollar offered. EURUSD has pushed up to 1.1430, moving clear of the early Jun peak, suggesting a possible extension of this rally through to the March high at 1.15. GBPUSD pushed off yesterday’s lows at 1.2480 to reclaim the 1.26 handle, calling for a move back to the 1.2670 resistance struck on the 9-13 July.
Data today is focused on the US industrial production report, seen +4.3% month on month, and the Empire State manufacturing index, forecast at +10 vs -0.2 last month. The Bank of Canada is expected to leave interest rates on hold at 0.25 per cent today, so we’ll be looking to get an update on how the central bank views the path of economic recovery. Fed’s Beige Book later this evening will offer an anecdotal view of the US economy which may tell us much more than any backward-looking data can.
Oil continues to chop sideways ahead of the OPEC+ decision on extending cuts. WTI (Aug) keeps bouncing in and off the area around $40 and price action seems to reflect the uncertainty on what OPEC and its allies will decide. The cartel is expected to taper the level of cuts by about 2 million barrels per day from August, down from the current record 9.7 million bpd. Secretary General Mohammad Barkindo had said on Monday that the gradual easing of lockdown measures across the globe, in tandem with the supply cuts, was bringing the oil market closer to balance. However, an unwinding of the cuts just as some economies put the brakes on activity again threatens to send oil prices lower. OPEC yesterday said it expects a bullish recovery in demand in the second half, revising its 2020 oil demand drop to 8.9m bpd, vs the 9m forecast in June. The cartel cited better data in developed nations offsetting worse-than-expected performance in emerging markets. EIA inventories are seen showing a draw of 1.3m barrels after last week produced an unexpected gain of 5.7m barrels.
Neil Wilson is chief markets analyst at Markets.com
