European stocks were firmer after US stocks rallied yesterday to finish at the best level in months, whilst Asia was mixed. The S&P 500 closed at 3,276, its best finish since February as decent corporate earnings supported the bulls who continue to shrug off the rising Covid cases as well as mounting US-China tensions. The broad index also managed to close at the high of the previous session, having previously closed 20 pts short of this level.
There are some concerns with US-China tensions after the closure of the consulate in Houston, with China retaliating by closing the US consulate in Chengdu. But this kind of tit-for-tat is nothing new - we have been dealing with a trade war for years and I think the market is fully expecting friction to increase, particularly as the US presidential election looms and domestic strife makes it all too convenient for the White House to bash China. UK-China tensions are something a little fresher and have led to Chinese authorities taking the English Premier League off air.
Tesla posted its first full year of GAAP profitability, meaning it can now be considered for inclusion in the S&P 500. Excluding special items, EPS came in at $2.18 on revenues of $6bn. Whilst the beat on deliveries reported earlier by the company indicated a strong quarter, this was better than most had forecast. Whilst the stock is still exceedingly rich based on the fundamentals, it’s one with such a backing that it just doesn’t seem to matter. In some ways it’s a talisman for the whole stock market – old fashioned ideas like valuation and discounted free cash flow models simply don’t matter when you have such an incredible amount of liquidity. It’s also a bet on the future of the automotive industry – which carmaker is going to be around in 50 years?
Microsoft shares fell after hours following its quarterly earnings revealed a slowing in cloud growth, with revenues from the Azure business down from 59 per cent to 47 per cent, although overall the company beat on both the top and bottom lines. Xbox revenues soared as gamers found ways to pass the time in lockdown. Likewise Americans stocking up on ice cream and other goodies lifted Unilever sales but emerging markets -without the help of an Ocado to bring consumers lockdown treats - were tougher.
UK Company Announcements
| IG Group (IGG) | Net trading revenue was up more than a third during the year to the end of May thanks to elevated activity among clients attempting to take advantage of the market volatility during the fourth quarter. However, management has already started to see a normalisation in activity, which it expects to continue throughout the 2021 financial year. |
| Relx (REL) | Revenues for the events business fell 71 per cent in the first half compared to the same period last year, pushing operating profit down by more than a quarter. |
| Helical (HLCL) | Just over 77 per cent of the rent due in respect of the third quarter has now been collected, with agreements in place for a further 14 per cent to be paid in instalments. After taking into account rent-free periods representing 4.9 per cent of the amount due, the commercial landlord expects this to rise to between 90.9 per cent and 95.3 per cent of all contracted rent by the end of September. |
| Howden Joinery (HWDN) | Howden Joinery fell into a pre-tax loss for its half-year to 13 June, with losses of £14.2m including government furlough income of £21.5m. The manufacturer and supplier of kitchens and joinery products has been heavily hit by the coronavirus pandemic. |
| Daily Mail & General Trust (DMGT) | The Daily Mail owner’s revenues slid by almost a quarter in the third quarter, on an underlying basis. Advertising sales dropped by 45 per cent as demand for print wavers during the pandemic. |
| Bodycote (BOY) | The pandemic pushed the thermal processsing services provider into a half-year pre-tax loss of £3.8m, with a decision yet to be made on its interim dividend. Bodycote's deferred 2019 dividend of 13.3p will be paid in September. |
| Cohort (CHRT) | Revenue increased by 8 per cent to £131m for the year to 30 April, while adjusted operating profit jumped by 12 per cent, reaching a record £18m despite a £1m hit from Covid-19. The group has visibility over 75 per cent of its revenue for the current year. |
| G4S (GFS) | Revenue dipped by 1.5 per cent at constant currencies to £3.35bn in the six months to 30 June, with the Covid-19 pandemic hitting its Europe and Middle East markets and UK cash solutions business. While adjusted operating profit declined by 5 per cent to £187m, this was ahead of analyst consensus expectations of £165m. |
On the data front, Germany's Gfk consumer confidence survey was better than expected, printing –0.3 vs the –4.6 expected. South Korea’s economy is in recession after the worst slump 57 years.
Today the focus is on the US weekly unemployment numbers, with initial jobless claims forecast to hold steady at 1.3m. Initial jobless claims last week of 1.3m were almost unchanged from the prior week. As noted after the release of the numbers last Thursday, the improving trend in initial jobless claims has all but halted, which may reflect the spike in coronavirus cases that has coincided with renewed lockdown measures in a number of economically important states such as Texas and California. There are also big worries that temporary layoffs are turning into permanent firings.
Continuing claims fell to 17.3m vs the 18m in the prior week, which was a tad better than the 17.6m expected. The total number of people claiming benefits in all programmes for the week ending June 27th fell to 32m a decrease of 430k from the previous week.
On the Covid front, US deaths exceeded 1,000 for the second day, whilst California – the most populous and economically important state – saw more than 12k cases on Wednesday, its largest single-day rise.
In FX, the dollar remains on the backfoot with major peers cementing gains. EURUSD has cleared the January 2019 peak at 1.1570 and looking for a further extension towards the next big Fibonacci level at 1.1760 and the September 2018 swing highs at 1.18. The outlook for the euro is more bullish – on a technical note the clearance of 1.15 is a big hurdle out of the way, whilst the agreement on the EU pandemic fund is fundamentally vital to pushing the euro higher. Longer term is could have very far-reaching repercussions for bond investors, too. GBPUSD was trading above 1.27 and the 200-day moving average and testing the descending trend line that forced the pullback on Tuesday – clearance of these two hurdles opens up a path to 1.30 albeit the fundamental bullish thesis on sterling is far cloudier.
Oil nudged up despite the rise in US crude inventories. WTI (Aug) pressed up above $42 after the EIA reported a crude oil inventory build of 4.9m barrels in the week to July 17th, vs the 2m barrel draw expected, albeit the API print had already flagged a likely increase in stockpiles. Stocks at the Cushing, Oklahoma, hub rose 1.375m vs last week's build of almost 1m.
Gold continues to march higher as real rates hit all-time lows with 10yr TIPS finishing at –0.88 per cent. Gold pressed up to $1,876 this morning to mark a new 9-year peak. The momentum that is chasing this trade should easily enable bulls to find the $1921 all-time high last achieved in 2011 – you get the feeling there is a lot of appetite to take out this level, but expect some considerable resistance and another pullback to $1,800 may be required first. After clearing the all-time high there is a chance of a move to $2k, but we should question whether the support from declining real rates will continue to act as a driver of gold prices without a significant inflationary follow-through. Nevertheless, it’s clear that the combination of a very uncertain macro backdrop, fresh geopolitical risk, the threat of inflation stemming from the massive injection of both monetary and fiscal stimulus make gold a clear-cut Covid winner.
Neil Wilson is chief markets analyst at Markets.com
