Join our community of smart investors

Market Outlook: Markets steady before Fed meeting, Hut Group pops as IPO market shines, Redrow, Tui & more

Traders are sitting on their hands ahead of more announcements from the US later today, with London equities down marginally in early trading
September 16, 2020

It’s Fed day: risk sentiment remains broadly positive but the big-ticket event is the Fed policy meeting. US stocks rose Tuesday as the two-day Fed policy meeting kicked off. Whilst there is relative calm in markets again after the tech-led sell-off produced a correction in the Nasdaq and a 7 per cent decline in the S&P 500, the expectation on the Fed to be very dovish may lead to volatility should the market think the FOMC isn’t offering enough detail on the future path of monetary policy.  

The S&P 500 added 0.52 per cent and managed to close above the psychologically significant 3,400 level after running into resistance at the 38.2 per cent retracement of the early September pullback, with the 21-day SMA sitting around 3,426, which may offer a further test for bulls. The Nasdaq added 1.2 per cent as Tesla shares rose a further 7 per cent, extending the rally from Monday’s 12 per cent gain. Overnight, Tokyo was flat as Yoshihide Suga was elected as Japan's new prime minister, replacing Shinzo Abe. European equity markets were slightly higher in early trade, though the FTSE 100 dropped. 

UK Company Announcements

Redrow (RDW)

Completions fell more than a third over the 12 months to June but reservations during the first 11 weeks of the new financial year are 12 per cent ahead of the comparable period last year. However, after swinging to a net debt position, manabement said it would not reume dividend payments until next year.

Advanced Medical Solutions (AMS)

Revenues slipped by almost a fifth to £39.3m and the operating margin halved to 11.3 per cent, after a hiatus on routine healthcare activity reduced demand for surgical and woundcare equipment. But AMS is seeing signs of recovery in most markets.

TUI (TUI)

Tui has promised the Competition and Markets Authority (CMA) that it will refund its customers for holidays by the end of the month. The watchdog has been investigating the travel operator after receving thousands of complaints from customers who were not receiving refunds for cancelled holidays within 14 days, as is required by consumer protection law.

Boku (BOKU)

Revenues grew 5 per cent to $24.7m (£19.2m) in the first half compared to the same period last year, as the payments division continued to benefit from stronger demand for services from digital merchants such as Netflix (US:NFLX) during lockdown.

Galliford Try (GFRD)

The group’s underlying pre-tax loss widened to £60m in the year to 30 June, versus a £17m loss in 2019. This reflects both the impact of Covid-19 and the settlement of final accounts on legacy contracts. On a statutory basis, pre-tax losses improved, more than halving to £35m thanks to a net gain on the settlement of the Aberdeen Western Peripheral Route project.

FRP Advisory (FRP)

With corporate insolvency work expected to rise across the UK, the restructuring group has acquired East of England-focused specialist corporate finance and forensic services firm JDC in an all-share transaction worth £5.3m.

Manolete Partners (MANO)

Having struggled to convince the market of its ability to generate cash from its portfolio of legal claims this year, the litigation finance outfit yesterday announced success in a claim worth £15m, of which £4.7m is now owed to Manolete. It could take several years to see the money, however.

Redde Northgate (REDD)

Arriving almost five months after the period end, the first set of full-year numbers for the recently-merged commercial vehicle lease group tell only half a story. The impact of Covid-19 on trading was nonetheless described as "material", though chief executive Martin Ward says activity is now back to pre-pandemic levels.

Plus500 (PLUS)

Ahead of its AGM today, the spread-betting platform reports that its first half operational momentum has continued. Active customer numbers are still on the rise, while platform usage "remains at elevated levels".

Hiscox (HSX) & RSA (RSA)

Shares in the business insurance providers surged yesterday, after the results of a test case brought by the Financial Conduct Authority were deemed more positive than initial fears. RSA said improved margins, immaterial changes in claims since the half-year, and strong Covid-19 reserves would "fully offset" the court judgment's impact on profits, while Hiscox said claims would now be around £150m below the upper end of its risk scenario.

Central Asia Metals (CAML)

After a tailings dam leak at its Sasa mine in Macedonia, the base metals miner has deferred announcing an interim dividend. The company said the leak lasted 90 minutes and had sent waste into a local lake.

Best of the Best (BOTB)

The organiser of car prize competitions raised its expectations for full-year revenue and profits, after trading ahead of forecasts this year.

 

There are several things to look out for from the Federal Reserve today, not least some firming up of the details around the new average inflation targeting regime.  After Jackson Hole, there were some unanswered questions for the FOMC. There was not much in the way of detail of how the Fed plans to deliver the new AIT framework, for instance. And Powell’s speech lacked in any real specifics on the nature of forward guidance that the FOMC is clearly leaning towards – this will be an important lever of the AIT approach, so it needs to be clarified at this meeting. Should forward guidance be based on a time horizon or specific economic data? Yield curve control has been shelved as an idea by the FOMC but remains an option should it desire. Today’s statement and press conference with Powell will be of great importance to iron out how AIT will be delivered. Powell stressed that if ‘excessive inflationary pressures’ were to build, or inflation expectations were to rise above levels consistent with its mandate, the Fed ‘would not hesitate to act’. This gives it a degree of latitude down the line should there be a major inflation overshoot, which as noted on several occasions, is a very real possibly if expectations become unanchored. So far, after rising sharply post the March trough in financial markets, US 10-year breakevens have levelled off, whilst benchmark bond yields have barely budged.  

 

The Fed is also likely to lean heavily on the need for Congress to come up with fresh stimulus – it cannot do all the lifting here. Whilst a fifth package remains elusive, Nancy Pelosi has signalled that Democrats could delay the October recess in order to get a deal done, with the White House saying the $1.5tn package floated by the ‘Problem Solvers Caucus’ was worthy of discussion. The Fed has not quite exhausted all its ammunition, but it’s very much in a position where it needs to wait for the fiscal support. Several Fed officials have been talking up the need for fiscal support. There will also be updated economic projections to watch out for along with the tone the Fed strikes on the economic outlook  – we know the Fed has taken a pretty cautious view of the economy and the loss of momentum in initial jobless claims may be a concern.

Looking ahead to today’s session, US retail sales will also be closely watched and may well show a sharp slowdown after Americans’ $600 stimulus cheques stopped. UK inflation figures earlier this morning showed a sharp drop in CPI inflation to 0.2 per cent in August from 1 per cent in July, as the Eat Out to Help Out scheme and the VAT cut on the hospitality industry bit into prices. 

Elsewhere, Hut Group shares got off to a lively start on their stock market debut, rising to 650p in what is the biggest IPO in London this year and for several years. As noted when the filing was lodged, after a considerable ramp in tech valuations this year – eg, Ocado +100 per cent in the last 12 months - this IPO looked like a well-timed move, at least on the part of the founder who is due a bumper £700m pay-out should all go well, whilst still remaining very much in control of the business. The question is whether this 10% margin business deserves a tech rating. A standard listing makes it ineligible for inclusion on the FTSE index although its mooted market cap would be enough just to make the FTSE 100. Any standard listing raises eyebrows as it means no index inclusion and lower governance standards. Arcane incentive schemes and a founder share model are also suspect. Founder Matt Moulding is also selling £54m of stock despite previously indicating he would retain all his shares. Heavy demand indicates what a tech multiple, zero per cent interest rates and a premium on growth can do for your stock.

Indeed, the IPO market continues to show considerable strength, which does not indicate significant signs of stress in capital markets. Snowflake, a cloud software business backed by Warren Buffett, got its IPO off cleanly at a price of $120, valuing the company at $33bn. Apple unveiled new products, but investors were underwhelmed by products like the new iPad Air and new watches, with the shares flat on the day and ticking lower by 0.67% in after-hours trading. All investors really care about is the 5G iPhone launch, when it comes.  

Crude prices rose after a surprisingly large draw on inventories and have now bounced over 8 per cent from last week’s lows. API figures showed stocks fell 9.5m barrels in the week ending September 11th, much more than the narrow 1.27m barrel draw expected. EIA figures today are expected to show a build of 2m barrels, which seems rather unlikely in light of the API report. Oil prices firmed despite OPEC and IEA reports this week indicating a slower recovery in demand in 2020 than previously forecast. Nevertheless, prices look vulnerable to a further pullback as the near-term uptrend runs out of steam and the longer-term downtrend re-asserts itself. 

 

Neil Wilson is chief markets analyst at Markets.com