US stocks rallied to close near all-time highs yesterday amid what some are saying are signs of greater confidence in the economic recovery in the US. Or perhaps it’s just even speedier decoupling between Wall St and Main St. Nevertheless, bond yields pushed higher amid a faster-than-expected rise in US inflation, whilst the market is starting to focus again on trade and tariffs. The fact that the broad stock market is at all-time highs is a testament to unbelievable amounts of monetary and fiscal stimulus – the patient is hooked, and only more drugs will do. The disconnect between the stock market and the real economy is too stark, too unjust and too indicative of a system that continues to favour capital over labour that, sooner or later, a change is gonna come.
Never mind all that for now though, stocks keep going up. The S&P 500 rose 1.4 per cent to end at 3,380, just six points under its record closing high at 3,386.15, with the record intraday peak at 3,393.52. Asian stocks broadly followed through, with shares in Tokyo up almost 2 per cent. European stocks failed to take the cue and were a little soft on the open, with the FTSE 100 the laggard at -1 per cent, though 22.3pts are due to BP, Shell, Diageo, AstraZeneca, GSK and Legal & General among others going ex-dividend.
For a taste of the real economy, we can look at TUI, which said group revenues in the June quarter were down 98 per cent to €75m. It's a total wipe-out of earnings, but it’s not a surprise – the business was at a virtual standstill for most of the period and was only able to resume some limited operations from mid-May. Just 15 per cent of hotels reopened in the quarter, whilst all three cruise lines remain suspended. TUI posted an EBIT loss of €1.1bn for the quarter, taking total losses over the last nine months to €2bn, with €1.3bn due to the pandemic forcing the business to be suspended. Summer bookings are down over 80% but it has got another €1.2bn lifeline from the German government. Shares fell over 6 per cent in early trade.
UK Company Announcements
| Tui (TUI) | Tui's third quarter revenues of €75m were 98 per cent down on last year's equivalent period, although 15 per cent of the group's hotel estate has reopened. The group recorded a pre-tax loss of €1.46bn for the quarter, rising to €2.3bn for the year so far, as coronavirus continues to throttle tourism. |
| GVC (GVC) | Adjusted cash profits dipped 5 per cent to £349m in the first half, in line with guidance. But trading was relatively robust in the period, with online net gaming revenue up by more than a fifth. |
| National Express (NEX) | The transport operator's shares dropped 12 per cent after half-year results revealed a pre-tax loss of £122m, compared with a profit of £88m last year. Passenger numbers fell 80 per cent following lockdown. |
| Renishaw (RSW) | The shares were down more than a tenth in early trading. Revenue from the larger ‘metrology’ business dropped by 11 per cent to £475m in the year to 30 June, thanks to US-China trade war tensions, a subdued machine tool sector and Covid-19. Combining the impact of lower sales with £24m in restructuring costs, statutory operating profit came in at just £6m, versus £100m a year earlier. |
| Helios Towers (HTWS) | Operating profit more than doubled year-on-year in the first half to $29.3m. The company is set to acquire 1,220 towers from mobile operator Free Senegal for a cash consideration of €160 million (£145m), as it continues to expand in Africa. |
| Empiric Student Property (ESP) | Revenue was down 5 per cent over the first half of the year after the student landlord reimbursed some rent for students that returned home in the wake of the pandemic. Bookings for the 2020/21 academic year are 65 per cent, down from 85 per cent the same time last year. |
| Sirius Real Estate (SRE) | Rent collection for the second quarter was 95.9 per cent, compared with 98.2 per cent the comparable quarter last year, but there was an 11 per cent decrease in the number of new lettings and reduction in square metres let compared to the same period in the prior year. Lettings in July recovered to be 4 per cent down but in terms of square/metres, new space leased was up 16 per cent. |
| 4imprint (FOUR) | The number of processed orders dropped dramatically during the first half, as demand for promotional products waned during the pandemic. Revenues dropped by more than a third to $266m and pre-tax profits landed at just $0.03m. |
| Topps Tiles (TPT) | Recent buy tip Topps Tiles announced that it now expects to record profits for its full-year after a strong period of summer sales, sending the shares up 18 per cent in morning trading. |
US-China tensions are rearing their head again. Officials meet this Saturday to review progress of the phase one deal. White House economic adviser Larry Kudlow the deal was ‘fine right now’. Sticking with trade, the US is maintaining 15 per cent tariffs on Airbus aircraft and 25 per cent tariffs on an array of European goods, including food and wine, despite moves by the EU to end the trade dispute. Crucially it did not follow through with a threat to hike tariffs, however it still leaves the risk of further escalation when the EU is likely to win WTO approval to strike back with its own tariffs.
Yesterday, despite the optimism in the market, there was - for me at least - some potential signs of bad news for the real economy (not the stock market, remember) with US inflation picking up faster than expected. You can read this as the economy doing better than fared as consumers return, but you can equally take a glass half empty view and see this as a major worry that prices of essentials are going to rise whilst economic growth stagnates – which can be a cocktail for a period of stagflation. Given the enormous amount of money being pumped into the system, there is a better than evens chance we get an inflation surge even if the pandemic was initially very disinflationary. Unlike in the wake of the financial crisis, the cash is not being gobbled up in the banking system as increased capital buffers etc, but is going into the (real) economy. Moreover, it’s being done in tandem with a massive fiscal loosening.
Year-over-year, headline inflation rose from 0.6 per cent to 1 per cent, whilst core CPI was up 1.6 per cent in July vs the 1.2 per cent expected. Food prices rose 4.6 per cent, whilst the cost of a suit is down a lot. The risk is that inflation expectations can start to become unanchored as they did in the 1970s when the Fed had lost credibility, this led to a period of stagflation and was only tamed by Volcker’s aggressive hiking cycle.
Investor optimism is keeping the dollar in check. The dollar index moved back to the 93 mark, whilst the euro broke above 1.18 against the greenback for a fresh assault on 1.19, twice rejected lately. Sterling is making more steady progress but is well supported for now above 1.30, however the dollar’s pullback may be short-lived. Gold held onto gains to trade above $1930 after testing the near-term trend support around $1865 yesterday.
Oil prices held gains after bullish inventory data and OPEC’s latest monthly report. WTI (Sep) moved beyond $42 after the latest EIA report showed a draw of 4.5m barrels last week. Meanwhile, as noted yesterday, OPEC’s new report indicated the cartel will continue with production cuts for longer. In its monthly report, OPEC lowered its 2020 world oil demand forecast, forecasting a drop of 9.06m bpd compared to a drop of 8.95m bpd in the previous monthly report. But the report also sought to calm fears that OPEC+ will be too quick to ramp up production again. Specifically, OPEC said its H2 2020 outlook points to the need for continued efforts to support market rebalancing. Compliance was down but broadly the message seems to be that OPEC is not about to walk away from the market.
Neil Wilson is chief markets analyst at Markets.com
