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Market Outlook: Stocks slip after Wall St bounce, FX markets tune into Brexit and ECB, Astra, Saga & more

London's blue chips are in the red again
September 10, 2020

Fear casts a long shadow. If the virus doesn’t get you, the fear might. It’s almost a trope in economic and trading circles: it’s not the virus causing the damage to the economy and businesses, but the twin enemies of a chaotic government response and worst of all, fear. Fear is what gets you in the end. Fear is what cripples the recovery, be that fear of the virus (I won’t go out) or fear of arbitrary knee jerk responses (why bother booking a holiday abroad). Fear of tax raids is another we might add for many investors looking at how public policy may affect their returns. 

There is a fear stalking some companies. Dunelm this morning warned off a ‘severe but plausible’ scenario in which there are further lockdowns over Christmas. Sales might not recover fully until 2023, management worry. Meanwhile IAG has warned demand has eased and now expects capacity to decline this year more than previously thought. Available seat kilometres are forecast to drop by 63 per cent in 2020 and still be 27 per cent below 2019 levels in 2021. Previously it had forecast declines of 59 per cent and 24 per cent respectively. The forecasts came as IAG announced a €2.75bn discounted rights issue to strengthen its balance sheet. Even Morrison’s, which has seen sales surge, is nursing a drop in profits because the new order means more of the lower margin online business is required.

Names like Azhag the Slaughterer and Gorbad Ironclaw are designed to strike fear into people’s hearts, but investors in Games Workshop have had less reason to be afraid than many. Today’s trading update shows continued strong progress despite the pandemic – indeed staying indoors for long stretches is something their customers are not afraid of. Shares jumped over 10 per cent after the company reported a very strong three months to August 30th, with sales up to £90m from £78m a year ago. Online growth has been strong. It also declared a dividend of 50p. Peel Hunt raised its price target on the stock.  

Yesterday saw a big risk rally as global equities recovered from a 3-day sell-off led by US tech shares. Wall Street - equity markets bounced strongly. The Nasdaq added 2.7 per cent, while the S&P 500 was up 2 per cent. The Nasdaq held its 50-day moving average, with this level offering the major support for the rally. The S&P 500 ran into resistance at the 21-day line. There was some selling into the close though, which makes you wonder if it’s a classic bull trap before the next swing lower. Vix futures (Sep) broke the rising trend line to trade at 28.50, having taken a 37 handle last Friday. The FTSE 100 climbed over 1.3 per cent to recover the 6,000 level, while the DAX added 2 per cent.  

UK Company Announcements

 

AstraZeneca (AZN)

A late-stage trial for ‘Fasenra’ as a treatment for chronic rhinosinusitis with nasal polyps showed that the drug met the group’s main endpoints of reduced polyp size and blockage. AstraZeneca also said this morning that it is transferring the listing of its American Depositary Receipts (ADRs) and US-listed debt securities from the New York exchange to the Nasdaq.

Saga (SAGA)The travel and insurance group says it has received instiutional backing for its strategy and £150m capital raise, led by former chief executive and chairman Sir Roger de Haan. Half-year results, also released today, show the group slumped to a £56m pre-tax loss in the first half of 2020.
TT Electronics (TTG)

The shares climbed by more than a third on the news that ‘Virolens’ – a 20-second Covid-19 saliva testing device which TT has helped to produce – has now launched. The test can be administered by anyone, making it a possibility for offices and airports. TT is the exclusive manufacturing partner for Virolens’ commercial launch.

Alpha FX (AFX)

Last week, the forex hedging firm told us it was keen to rebuild office camaraderie among its share-owning sales team. A week on, five directors and members of senior management are selling just under a third of their combined holdings for £35m, in response to strong investor demand.

British Land (BLND)

Chief executive Chris Grigg will step down from the board following the group's 2021 interim results in November, after 11 years at the helm of the commercial property group. He will be replaced by chief financial officer Simon Carter.

Games Workshop (GAW)

The shares were up over a tenth in early trading after the group announced that trading for the three months to 30 August was ahead of expectations. Sales came in 15 per cent higher than a year earlier at £90m, with operating profit (excluding royalty income) surging by 61 per cent to £45m. This has been driven by growth from its online and trade channels. Games Workshop has also declared a 50p per share dividend that will be paid on 23 October to shareholders on the register at 18 September.

Forterra (FORT)

Revenue for the first six months of the year was unsurprisingly behind the comparable period last year as construction site shutdowns took their toll. However, sales in July and August recovered to 89 per cent and 82 per cent of the prior year's sales, respectively. Adjusted cash profits for the full year are excpected to come in at between £27m and £32m.

Rank Group (RNK)

Full-year net gaming revenue (NGR) fell by 15 per cent to £585m and operating profits plunged by two-fifths to £23.5m, after the pandemic shuttered casino venues. Underlying digital NGR was up 23 per cent. Rank is not paying a final dividend.

Team17 (TM17)

The video game developer’s top-line hit a record £38.8m in the first half, as demand spiked during lockdown. The company expects revenues to even out across the year, given the second half weighting of new title releases.

  
Dunelm (DNLM)

The homeware retailer will not pay a final dividend this year, as revenues slipped 4 per cent in 2020. But the company expects an interim dividend for 2021, as sales rebounded post period end.

Breedon (BREE)

The Competition and Markets Authority (CMA) says that the undertaking offered by Breedon to satisfy its concerns regarding the CEMEX acquisitions “might be accepted”. These involve divesting a number of assets including some ready-mix concrete plants in England. Breedon says it should be able to complete this “in the near future”, paving the way to integrate its purchases from CEMEX later this year.

John Menzies (MNZS)

Reflecting the pandemic disruption to international air travel, revenue for the six months to 30 June was a third lower than a year earlier. As a result, the group is guiding that it will be loss-making in the first half. Net debt has come down by more than a quarter from the December year-end position to £160m and Menzies has secured a new covenant package that will replace the leverage multiple with a minimum cash profits (Ebitda) test instead.

Speedy Hire (SDY)

Revenue (pre-disposals) for the year-to-date are 23 per cent lower than a year earlier although equipment utilisation rates have improved across the first half as activity levels recover. UK and Ireland utilisation stood at 52.9 per cent as at 4 September. On the back of strong cash collections, net debt (excluding lease liabilities) has come down by a quarter from the March year-end to £59m.

WM Morrison(MRW)

Like-for-like sales (excluding fuel and VAT) increased by 9 per cent year-on-year in the six months to 2 August, with growth accelerating during the second quarter. However, a 37 per cent drop in fuel sales saw total revenue dip by 1.1 per cent to £8.73bn. Pre-tax profit decreased by 28 per cent to £145m on the back of £155m of Covid-19 related costs. The group has increased its interim dividend by 6 per cent to 2.04p.

European stock markets turned lower this morning as investors look ahead to the ECB meeting today. The meeting comes amid a sharp rally for the euro that has left policymakers concerned. The line in the sand for the central bank was 1.20 on EURUSD – a level that prompted chief economist Philip Lane to comment that "the euro-dollar rate does matter”. Traders should pay attention to any nod to currency worries from Christine Lagarde. Whilst the consensus is that the ECB will take no further policy action, policymakers may choose to act, albeit any action at all would be around the PEPP programme rather than slicing interest rates lower. As noted earlier this week, the sharp decline in inflation could force the ECB to take swifter action than the market is anticipating. Eurozone inflation turned negative in August, declining to –0.2 per cent from +0.4 per cent in July. Sources yesterday indicated the ECB is more confident in its economic projections – it was not entirely clear whether they meant they are more confident that they are right about the forecasts, or more confident the data will improve. 

However, even here the ECB probably doesn’t need to push its PEPP envelope, given only €500bn has been used out of €1.35bn available. I think Christine Lagarde may seek to talk up this being a target, rather than a ceiling. In summary, on the balance of probabilities the ECB will not make any monetary policy changes but will lean hard on jawboning the euro lower and talking up the unused room in the PEPP programme and that it will do whatever it takes to support the recovery and stand ready to expand it if required. EURUSD trades at 1.1820 in a steady pattern ahead of the meeting. 

The pound rebounded yesterday afternoon and held gains after the EU said it would not kybosh talks because of the U.K. threat to rip up the withdrawal bill - the internal market Bill. This removed the immediate risk of a collapse in trade talks, which appears to have driven the aggressive move lower in the morning with cable hitting a six-week low. This sent cable hard back to 1.30 in a sharp risk reversal that many newly minted shorts firmly on the wrong side. But we should caution that sterling remains very exposed to further negative headlines and risks appear still skewed to the downside for the time being and we can only say that sharp moves lower - in the region of one big figure - are to be expected. The EU this morning is said to be considering legal action against the UK over the bill. GBPUPSD just traded a little under 1.30 again as morning trading got going in London, possibly with this news weighing on sentiment – again highlighting the headline risk. 

Today sees the talks wrap with the usual order of service involving the two sides giving separate press conferences. The focus on the EU side will be to what extent the internal market bill has undermined trust.  Remember a deal will always look a lot more distant than it may be in reality.

US jobless claims numbers are also due later. These have become a useful barometer for the US economic recovery and tend to show that the momentum from the initial post-lockdown snapback is waning. Last week, the initial jobs claims improved but the methodology changed somewhat and the only stat we really cared about was that the total number of people claiming benefits in all programs for the week ending August 15th was 29,224,546, an increase of 2,195,835 from the previous week. 

 

Neil Wilson is chief markets analyst at Markets.com