Still no love for Europe? Equity indices in Europe dropped last week as risk appetite waned into the weekend, whilst US stocks closed Friday at record highs, albeit the rally since the March lows has been very uneven – all the chatter over the weekend was about a K-shaped recovery. Can beaten down value stocks catch up? With Europe lacking a lot of the high-quality tech and growth names, it may struggle until there is a vaccine, the pandemic is over, and dividends are reinstated. Short-term the price action in stock indices seems more down to the individual narrative of the day or week.
Today it’s positive. European equities took the cue from a strong Asian session and pushed higher on Monday morning, with the narrative centering on treatment and vaccine news. Donald Trump is said to be mulling fast-tracking AstraZeneca’s vaccine candidate, whilst the FDA issued an emergency use authorisation for using plasma from recovered patients to treat Covid-19. Shares in Astra rose 2 per cent in early trade. Meanwhile, the US and EU have struck a ‘mini’ deal to cut tariffs on a range of items, which marks an important de-escalation of trade tensions that has dogged relations for many months.
BT shares leapt 7 per cent after reports it is seeking to bolster its defences against a possible takeover. At a valuation of £10bn, the group has become a definite target. And whilst BT has a lot of legacy baggage – notably £18bn in net debt and a major pension deficit - it’s also got the Openreach crown jewel, which would be worse considerably more on its own than the group is valued today. Of course, there is no formal offer, but shares could jump further if one emerges. Deutsche Telekom, which owns 12 per cent of BT, is seen as a likely candidate. The question is whether there could be more bombed out UK-listed stocks that could be taken out by a timely takeover...perennial rumour-favourite ITV, for instance?
UK Company Announcements
| BT Group (BT.A) | Reports over the weekend suggest that BT has taken action against a potential takeover bid worth around £15bn, or 151p a share. Shares were up as much as 7 per cent in morning trading. |
| Rio Tinto (RIO) | A board review of the destruction of a sacred aborginal site at Juukan Gorge has said no single person was to blame, but chief executive Jean-Sebastien Jacques and two others will be denied £4m in total in long- and short-term bonuses for the scandal. |
| Pearson (PSON) | The publisher has appointed former Walt Disney (US:DIS) executive Andy Bird as its new CEO, starting from 19th October. Mr Bird joined Pearson as a non-executive director in May. |
| Bunzl (BNZL) | More good news for shareholders today, after the distribution and services group reinstated its 2019 final dividend with half-year numbers. Separately, the FTSE 100 firm has announced two bolt-on acquisitions. |
| Balfour Beatty (BBY) | The group’s 50:50 joint venture with Jardine Matheson – Gammon Construction – has been awarded a £1.27bn contract to expand Terminal 2 at Hong Kong International Airport. This follows the £760m major tunnel contract that it was handed by the Hong Kong Airport Authority in the first half of the year. |
| Meggitt (MGGT) | The group has signed a “multi-million pound” contract with offshore floating platform specialist Modec (JP:6269) to supply printed circuit heat exchangers for a floating production storage and offloading vessel (FPSO). The FSPO will service the Bacalhau offshore oil field in Brazil, an asset jointly owned by Equinor (US:EQNR), ExxonMobil (US:XOM) and Petrogal Brasil. |
| Henry Boot (BOOT) | Pre-tax profits came in ahead of management's expectations during the first half thanks to its land promotion business, which sold over 2,000 plots. That prompted management to recommend a 2.2p a share dividend. |
| Frasers Group (FRAS) | Frasers has announced a £37m deal to acquire the assets of fitness retailer Dave Whelan Sports Limited. A further £6.9m may be due depending on the number of leasehold interests acquired as part of the transaction. DW made a loss of £20.1m in its year to 31 March 2019. |
| JD Wetherspoon (JDW) | Almost all of Wetherspoons' sites are now open. The group attributed a sales recovery to the Eat Out to Help Out scheme and the availability of outdoor seating, and expects "a period of more subdued sales" once the scheme has ended. The group expects to make a loss for the year ending 26 July 2020. |
| Clipper Logistics (CLG) | Revenues hit a record £0.5bn in the full year ended in April, as the logistics company was supported by healthy online retail trading in its e-fulfilment business. |
Elsewhere, sterling made a push higher last week, but the dollar came back. Brexit talks did not go very well and there was virtually zero progress on some key elements. The failure to break the long-term weekly trend resistance makes GBPUSD susceptible to further pull backs, with a gravestone doji weekly candle also a bearish indicator. Support kicked in at 1.3060 on Friday and offers the near-term test for bears. Bulls will require a weekly close above the trend line to be confident. EURUSD failed to overcome 1.1960 and pulled back to 1.1760 where it has found support. A further rise in EUR net long positions to almost 200k contracts evident in Friday’s COT report from the CFTC indicates extremely bullish positioning that may be too crowded and liable to a squeeze lower. GBP speculative positioning turned net long from net short for the first time since April.
What we're watching this week
Republican convention fires campaign starting pistol
The Democrats seem to have got through their set-piece without a hiccup. Now over to Trump and co for the Republican convention, which will not only mark the starting pistol for this year’s presidential run, but also the race for the 2024 GOP candidate. Market attention will increasingly come around to the November presidential race with barely over two months left until polling day. Vix futures indicate investors are starting to position for more volatility as the election approaches and we should be prepared for a decent nudge higher in volatility and swing lower for stocks over the next two months. This is will be the last major set piece event before the first presidential debate on September 29th.
Jackson Hole
A confusion of central bankers convenes in Wyoming online for the annual Jackson Hole Symposium. This year’s virtual theme is “Navigating the Decade Ahead: Implications for Monetary Policy”. I could answer that in one sentence: lower for longer, outright debt monetization, force inflation up to clear debts. But I’m not a central banker, although I would go to Jackson Hole for the trout fishing. Federal Reserve chair Jay Powell speaks on Thursday just a few moments before the US cash equity on Wall Street. Bank of Canada Governor Tiff Macklem follows and Bank of England Governor Andrew Bailey speaks on the Friday. Given the way the minutes of the Fed’s July meeting rocked risk appetite and checked the bulls’ progress, this will offer a chance to catch up on where the Fed one month on with its mid-September FOMC meeting in focus.
Economic data to watch
There is a lot of economic data to get through this week, notably some Q2 GDP second estimates for the US among others. On Tuesday we are looking at the US CB consumer confidence report. Wednesday sees the weekly crude oil inventories report as well as US durable goods orders and Australian construction activity. On Thursday the US weekly initial jobless claims number gets released, after last week’s disappointing print of 1.1m. Look also at the pending home sales and preliminary (second estimate) GDP numbers.
More US data rounds out the week on Friday with the Fed’s preferred inflation gauge, the core PCE price index; personal spending; University of Michigan consumer sentiment; and the Chicago PMI on the slate.
Earnings to watch
Ad titan WPP reports it interim results for the six months ended June 30th on Thursday. The advertising giant is a useful barometer of economic confidence. Big brands have slashed marketing budgets to cope with pandemic and WPP has warned of the hit it will take this year. But rival Publicis reported a 13 per cent drop in second quarter like-for-like sales, which was well ahead of the –20 per cent anticipated. Shares in WPP are down over 40 per cent this year – could Publicis offer a clue as whether the stock may find a new course? Does WPP see ad spend picking up? How has the Facebook boycott impacted it? We are also interested in recruiter Hays – which reports finals on Thursday and is often a great indicator as to the overall health of the labour market globally. Salesforce.com (CRM) is expected to deliver earnings and revenue growth when it reports numbers for the quarter ended July on Tuesday. EPS is seen at $0.7 on revenues of $4.9bn.
Neil Wilson is chief markets analyst at Markets.com
