Back to school: the unruly mob are back. But that is enough about MPs going back to work - children start the autumn term this week and the furlough scheme starts to unwind with the government reducing its contribution to employees’ wages to 70 per cent in September. Furlough forever is simply not an option – zombie staff, zombie businesses. But it means unemployment is surely set to rise – and consumer confidence always follows. The chancellor is floating a tax raid – better to monetize the debt surely?
Stocks were a tad weaker on Monday, but August was a great month. The MSCI World index rose 6.6 per cent and the S&P rallied over 7 per cent to record their best August since 1986. The Nasdaq rose 10 per cent. August is usually a poor month for stocks. Tuesday morning saw a firm bounce for the major European bourses, though the FTSE 100 lagged as it played catchup following the bank holiday. A stronger sterling is also dragging on the big dollar earners. AstraZeneca has started large-scale human trials of its coronavirus candidate vaccine in the US.
UK Company Announcements
| Saga (SAGA) | A white knight - in the shape of former chief executive and chairman Sir Roger De Haan - has arrived, pledging to invest £100m in the cruise operator-insurer. The terms appear generous, structured across three placings at between 15p and 27p a share, with the aim to raise a further £50m from shareholders. |
| AA (AA.) | The roadside recovery business's private equity courtship is taking longer than expected. While three possible offers are in play - from Platinum Equity Advisors, Warburg Pincus, and a joint bid from Centerbridge and Towerbrook Capital - a firm bid by today's deadline looks unlikely, though an extension has been granted until 29 September. |
| Dunelm (DNLM) | The homeware retailer's shares rose 5 per cent after it revealed sales had grown year-on-year in July and August by 59 per cent and 24 per cent respectively, thanks to the opening up of stores, pent-up demand and the timing of a summer sale. Dunelm releases its full-year results on 10 September. |
| Capita (CPI) | According to reports over the weekend, the group is set to close over a third of its UK offices permanently as it shifts to more flexible working arrangements. The outsourcer had already decided not to renew leases on 25 of its properties and now plans to increase this number to up to 100 workplaces. The move is not expected to result in job cuts. |
| Veolia (FR:VIE) | The group has made an all-cash offer to buy Engie’s (FR:ENGI) 29.9 per cent stake in rival Suez (FR:SEV) for €2.9bn (£2.6bn). Proposing a €15.50 per share buyout – a 50 per cent premium to Suez’ closing price on 30 July – Veolia is aiming to launch a full takeover once it receives regulatory approval. It says the tie-up will boost earnings from the first year thanks to €500m of identified synergies and group debt will “remain under control”. Engie says it will “study this proposal in the coming weeks”. |
| M&G (MNG) | The lowly-valued asset manager has completed the acquisition of wealth management platform Ascentric in less than four months. The deal diversified M&G's UK business and adds £15.5bn-worth of assets managed by more than 1,500 advisory firms. |
| Draper Esprit (GROW) | Rather than wait until the end of a January lock-up to cash in its shares in games company Zynga, the venture capital group has forward-sold its stock to an unnamed third party, boosting its net cash balance by £44m to around £60m. |
| Urban Logisitics (SHED) | Just six months after raising £136m via a share placing, the urban logisitics landlord has announced plans to conduct a further equity raise - of an as yet undisclosed amount - to help take advantage of an identified pipeline of £389m in assets. |
| Dalata Hotel Group (DAL) | The Irish hotel group slumped to a €70.9m pre-tax loss over its first half due to a record-low occupancy rate caused by the coronavirus pandemic. All of the group's hotels have now reopened, with occupancy levels expected to be around 40 per cent in August. |
| AstraZeneca (AZN) | The drug ‘Farxiga’ has been found to reduced chronic kidney disease progression and risk of death in late-stage trials. Meanwhile, ‘Imfinzi’ has been approved in the EU for small-cell lung cancer. Yesterday, AstraZeneca said that a potential Covid-19 vaccine created by Oxford University had entered late-stage studies in the US. |
| STV (STVG) | The broadcaster’s share price shot up as much as 9 per cent in morning trading, as advertising revenues returned to growth in August. The company logged its highest ever audience growth, up 12 per cent, in the first half. |
| CentralNic (CNIC) | Pre-tax losses widened by almost a quarter to $1.4m (£1.1m) in its first half, although the internet domain name specialist saw its top-line more than double to $111.3m. |
The Federal Reserve has put a floor under markets and a ceiling on rates, delivering conditions where stocks can only float higher. We call this TINA – There Is No Alternative. It’s not sustainable of course, but it won’t stop the Fed and other central banks continuing to inflate the bubble. The Fed’s policy shift on inflation has marked a important change for the central bank and it may be followed by the ECB and others. For our guide on Modern Monetary Theory click here.
Vix futures – the so-called ‘fear gauge’ are telling another story. These have started to grind higher despite stocks rallying, which raises a warning about the future path of the market. As previously mentioned, volatility should rise as the election approaches and the races proves far tighter than it currently looks. In summary, the options market is sending a signal that the stock market is not.
Sentiment this morning is helped by data showing Chinese factory activity rose at the fastest pace since 2011. French and Spanish manufacturing PMIs softened, dropping under 50 to signal contraction, while Italy’s was a little better than expected at 53.1.
Some of the moves in US shares are striking. Apple rose over 3 per cent to $129 after splitting, whilst Tesla shares rocketed 13 per cent on its busiest day ever. Stock splits shouldn’t make a difference, except this time they have. Tesla is up 74 per cent for the month. Zoom rose almost 23 per cent in after-hours trade after it reported a 355 per cent rise in revenues to $663.5m for the July quarter, smashing forecasts for around $500m. Zoom has proved to be a Covid winner of epic proportions – but shouldn’t we all be going back to the office by now? The UK significantly lags Europe and others in ‘getting back to work’ statistics – this has a huge implication for productivity and for the wider economy.
The dollar continues to soften and trying to guess the bottom is akin to catching a falling knife. The dollar index sank to fresh two-year lows in the wake of the Fed’s inflation shift. Perennial dollar bulls have been caught off guard with the unwind, however the Fed’s recent shift on inflation targeting only underlines that bears called this early. More inflation and a central bank prepared to let it happen should reduce the purchasing power of the dollar and therefore it ought to weaken. However, with the buck usually a safe harbour, it shouldn’t soften too much more.
The pound was up, with GBPUSD pressing on the post-election euphoria high of last December a little above 1.34. There are Brexit risks ahead – talks recommence next week – but for the moment the major driver of this is the dollar’s weakness. Gold futures rose to $2,000/oz as the weaker dollar lifted commodity markets and US real rates – 10-year TIPS – have sunk again as inflation expectations rise.
Neil Wilson is chief markets analyst at Markets.com
