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Market Outlook: Pound at 6-week low, Europe stabilises but risk sentiment fragile, Astra, Tullow & more

London's blue chips have gained ground in early trading but small caps are becalmed
September 9, 2020

Tech stocks bled heavily again for a third straight day as trading resumed on Wall Street following the Labor Day weekend. Tesla slumped a whopping 21 per cent to notch its worst day ever. The other major tech giants also dropped heavily as the Nasdaq fell 4 per cent and entered correction territory – down 10 per cent from its recent peak. Whilst this began as more of a technical correction within tech following the astonishing ramp in August than a broad risk-off move, it is nonetheless bleeding into the broader market and dragged down the majority of stocks. US benchmark yields have retreated and oil prices have rolled over. There was some rotation going on - Disney, Nike, McDonald's, Ford and GM rose – but the S&P 500 still declined almost 3 per cent and is not so far off correction territory itself. On the whole there is a sense that this sell off represents that sentiment had become too exuberant and needed to correct. We may expect the US market now to chop in W-pattern over the coming months and follow the path taken by European equities since June with the loss of momentum in the economic recovery and US election risks likely to become more visible in equity markets.

Asian equities fell with the weak US handover. European stocks opened a little bit higher in early trade but risk sentiment appears very fragile. The FTSE 100 is enjoying the pound’s distress with heavyweight dollar-earners like BP, Shell, Unilever and British American Tobacco among the best risers. In dollar terms the market is flat. The index got a confidence boost as Barclays raised their call on UK equities to ‘market-weight’ from ‘underweight’.

Nevertheless, investors are becoming worried again about rising Covid cases across many developed markets which threaten the trajectory of the recovery and may well weigh on demand in a number of sectors. The evidence is evident in a couple of markets. Oil prices have rolled over with WTI dropping under $37 to hit its weakest since the middle of June. Another tell that this tech-led selloff is more than just a simple technical correction are bond yields. US 10-year Treasury yields logged their biggest drop in a month, sliding from 0.72 per cent Friday to 0.682 per cent. Despite the move in yields gold prices remain resolutely stuck to the $1930 anchor having tested $1906 and the 50-day SMA yesterday.

There is also some negative headlines around work on a vaccine which may weigh on risk a touch, or at least provide algos with a sell signal. AstraZeneca shares fell after it was forced to pause clinical trials of its Covid-19 vaccine candidate after a participant in the study was taken ill. Such are the problems with pinning hopes on a vaccine for a return to normal to be possible. The worry is that while we have all kind of assumed that one company will come up with vaccine later this year, it’s not going to be plain sailing.

UK Company Announcements

AstraZeneca (AZN)

A phase three coronavirus vaccine trial with Oxford University has been paused in light of a suspected adverse reaction in a UK participant. Stat News first reported the news after market-close yesterday, citing a company spokesperson saying that AstraZeneca’s standard review process triggered the pause, allowing a review of safety data.

Tullow Oil (TLW)

Shares in the struggling oil company are off again today, after half-year numbers revealed that liabilities now outweigh assets. A post-tax loss of $1.3bn reflects exploration write-offs and impairments totalling $1.4bn, while uncertainties around the group's ability to secure waivers on its gearing covenants "may case significant doubt that the group will be able to continue as a going concern".

Emis (EMIS)

Pre-tax profits climbed up by more than two-fifths to £17.7m in the first half year-on-year, as the healthcare software provider secured more work with the NHS.

Computacenter (CCC)

The IT reseller’s top-line nudged up 1.5 per cent in the six months ended in June, as losses from industrial customers were offset by new business wins with the government and in the financial services sector.

Frontier Developments (FDEV)

The games developer saw full-year pre-tax profits decline 17 per cent to £16.2m. Frontier launched a fourth new game during the period, Planet Zoo, while its research and development spend jumped by 20 per cent to £24.6m.

Sanne Group (SNN)

Despite a second quarter slowdown in new fund activity, the alternative asset and corporate services provider has again shown its resilience with a strong set of half-year numbers, with the underlying operating profit margin up 210 basis points to 27.4 per cent. The business pipeline has also resumed growth in recent weeks.

FRP Advisory (FRP)

Deloitte has put its restructuring business up for sale, amid ongoing concerns of conflicts of interest, the FT reports. The dynamic arguably highlights the opportunity for FRP, which increasingly competes with the Big Four consultancies for insolvency mandates.

Ryanair (RYA)

The airline sold €850m in five-year bonds yesterday, having conducted a €400m share placing last week.

Avon Rubber (AVON)

The shares were up 6 per cent in early trading after the group announced that it has struck an agreement to purchase helmet supplier Team Wendy for $130m (£110m). Team Wendy’s products are used by the US Department of Defense as well as other military and first responder customers around the world. The acquisition will be funded using the proceeds from the sale of the dairy business and is expected to complete by the end of this year, subject to shareholder approval.

Wincanton (WIN)

The group says that thanks to an improved trading performance in July and August, cost cutting measures and the recovering economy, its results for the year ending 31 March will be “materially ahead” of market expectations. This assumes that there is no further severe disruption from Covid-19. The digital and e-fulfilment business has benefitted from increased demand for online retail – revenue is significantly higher than pre-pandemic levels and margins have expanded. The shares were up over 10 per cent in early trading.

Tesla shares got well and truly smoked after it was not added to the S&P 500, to some surprise. Tesla stock hadn’t traded below its 50 day average price since April 13 and closed the day at this level at $330 – this level needs to hold or we could see further declines for the stock. The market was surprised by Tesla not being included in the index. At the time, we talked a lot about how possible inclusion in the S&P 500 was a big driver of the stock’s rally earlier in the year and therefore being snubbed will force some funds to rethink whether they need to hold such a high beta stock if it’s not part of the index.

 

In FX markets, sterling is finding the going very tough, sinking to a 6-week low with the dollar catching a bid and Brexit risks weighing. DXY has advanced to clear 93.50 and test the top of the descending wedge, while EURUSD dropped further under 1.18 ahead of the ECB meeting which might be a lot more dovish than the market thinks. This is not a pure dollar move by any means - the pound was also at its weakest since the end of July against the euro, too. For cable this has meant the build-up of downside pressure has blown out the stops at 1.30 and GBPUSD is running south with not a lot of support until 1.28. Brexit risks are a major factor – the UK government admitted it will break international law in order to fix the withdrawal agreement should there be no deal by October 15th. Talks continue today between the UK and the EU and there are clear headline risks as traders see a higher chance of no deal emerging. However, we should caution that a deal will likely emerge at the last moment after considerable brinkmanship from both sides that makes it seem as though a deal is impossible. Nevertheless, with still 5 weeks to go before the deadline imposed by the British government, there may be a very rough ride ahead for the pound.

 

Stops are out as GBPUSD trades below 50-day SMA.

Having pushed clear of the 21-day SMA the dollar tests top of the descending wedge, 50-day SMA above.

 

 

Neil Wilson is chief markets analyst at Markets.com