Stock markets firmed in early European trade but remain battered and bruised by yesterday’s sell-off as fears of a second wave of cases and new lockdown measures dealt a blow to risk sentiment. Selling pressure has been building for some time and the dam broke yesterday. A recovery in the final hour of trade lifted the market off the lows so it wasn’t full capitulation, but there could yet be more downside as the S&P 500 approaches correction territory.
The S&P 500 declined by 1.2 per cent and the Dow dropped 1.8 per cent but tech stocks fared better with the Nasdaq flat for the day. Shares in Apple rose 3 per cent and Microsoft was up 1 per cent as some of the Covid winners showed more resilience to fears over second waves of the pandemic and fresh lockdown measures, which seemed to be the trigger. Despite the heavy selling, bulls put in a strong finish - the Dow was down over 900 points at the low before ending –500pts. At its lows the S&P 500 plunged by as much as 2.7 per cent. Nevertheless, the broad market is now already –6 per cent for the month of September, has notched four straight daily declines for the first time since March, and is over 8 per cent off its all-time high.
The FTSE 100 fell over 3 per cent, breaching the 21-day simple moving average line. Despite the pressure the bulls just held the 5,800 round number and closed above the Sep 4th low of 5,799. The Stoxx 50 breached the July lows and is now close to its Jun bottom having sunk under its 200-day SMA. The move follows a clear period of congestion that was calling for a breakout, having been caught in an ever-narrower range. The DAX fell almost 4.5 per cent with heavy selling into the closing bell seen as bears tried but failed to crack the 12,500 round number as the 78.6 per cent retracement of the Feb-Mar rout held. There were modest gains in early trade on Tuesday but the rally looks a little wobbly.
UK Company Announcements
| TUI (TUI) | The travel operator is targeting annual savings of €300m in cutbacks that threaten 8,000 jobs, after having been forced to cut its winter capacity to 40 per cent of normal levels. TUI expects to operate at 80 per cent its capacity next summer. |
| Whitbread (WTB) | Whitbread had opened 98 per cent of its hotels by the end of August, and the group's first two weeks of September were ahead of the market. But up to 6,000 redundancies could be made with medium-term trading expected to be muted, following a first half period that saw sales fall by 77 per cent against last year's comparable period. |
| Kingfisher (KGF) | B&Q owner Kingfisher reported a 62 per cent rise in its interim pre-tax profits, with retail profits driven by lower costs and a strong first half for B&Q as DIY activity surged in lockdown. |
| LTG (LTG) | The software company has reinstated its 2019 final dividend of 0.5p, following a robust first half this year. Revenues nudged up 2 per cent to £64.1m. |
| Judges Scientific (JDG) | Organic revenue dipped by 12 per cent year-on-year in the six months to 30 June, but the overall topline only declined by 7 per cent, to £37.4m, reflecting the positive impact of acquisitions. Adjusted operating profit came in 22 per cent lower versus a year earlier at £6.7m. The interim dividend has been increased by 10 per cent to 16.5p a share. |
| Alliance Pharma (APH) | First-half revenues slipped 7 per cent to £61.7m, with consumer healthcare down by 3 per cent and prescription medicines (the smaller business) down 15 per cent after a general slowdown in routine healthcare activity. With net debt lower than the year-end mark, Alliance has announced interim dividend – having suspended the final 2019 pay-out. |
| AG Barr (AGB) | Pre-tax profits fell by almost two-thirds to £5.1m during the first half. Lockdown and the impact on people’s purchasing habits have dealt a blow to the group’s trading. Still, management expects the full-year performance to be in line with its revised expectations relayed in July. The shares were up by a tenth this morning. |
| Beazley (BEZ) | The insurer's shares are down 13 per cent this morning, after management doubled forecasts for its pandemic-related business interruption claims to $340m net of reinsurance. As a big underwriter to the conference industry, the persistence of social distancing measures has resulted in a further wave of postponements or cancellations. |
| Close Brothers (CBG) | With the outlook for the UK economy teetering between a second spike in Covid-19 infections and a no-deal Brexit, the merchant bank has signalled is confidence by reinstating a full-year dividend of 40p per share. A strong result from its securities dealing arm Winterflood took some of the sting out of a four-fold hike in loan impairment charges. |
| JD Wetherspoon (JDW) | Wetherspoon announced that it is planning to cut up to 450 jobs in pubs at six airports, citing the large reduction in passenger travel and a subsequent blow to trading at these sites. |
| Hikma Pharmaceuticals (HIK) | The group has received a ‘minor complete response letter’ (CRL) from the US medicines regulator about its abbreviated new drug application for its generic version of GlaxoSmithKline’s Advair Diskus product. Hikma said it was working to address the questions raised by the CRL. It now expects approval for the product early next year and has lowered its generics guidance for 2020. |
| Ideagen (IDEA) | Revenues climbed up by more than a fifth in 2020 to £57m, although the risk management software company moved to a small pre-tax loss of £0.1m. |
Fading hope for another round of stimulus in the US is another weight, with the death of Ruth Bader Ginsburg over the weekend seen as a decisive blow against a bipartisan deal being achieved before the election, since it materially magnifies the polarisation in Washington. A deal will need to wait until after November 3rd. In addition, a heavy ramp up in August with far too much hot money chasing too few shares, increasingly stretched valuations, the lack of a vaccine on the horizon and the rising risk of volatility around the US election – and uncertainty over whether we will get a clean result - seems to have caught up with the markets.
The UK government is set to introduce fresh measures to ‘control’ the virus – curfews and working from home if possible. What a difference a month makes – only a few weeks ago we were being implored to get out and about to help out. It’s almost like they don’t know what they are doing. While pub shares fell on curfew news, several earnings reports today highlight the uneven nature of the recovery so far, and the uncertain path ahead.
Tui – uncertainty over the course of lockdowns and quarantine rules is leaving holidaymakers unsure about booking in the coming months. The winter 20/21 programme has been further reduced by 20 per cent since the Q3 update, to around 40 per cent adjusted capacity, reflecting ‘the current uncertainty relating to travel restrictions’. TUI says it is currently 30 per cent sold for the adjusted winter capacity. Compared to the normal levels of prior year, bookings are currently down 59 per cent, in line with adjusted capacity. Consumers are much happier to assume things will be ‘back to normal’ by summer 2021. Tui says bookings are up 84 per cent but at 80 per cent adjusted capacity, however we should caution that much of this will be pushback demand from this summer as consumers changed travel dates to next year. Cost-cutting has helped TUI weather the storm – that and some whopping bailouts from the German government, but it and the entire travel industry needs governments across Europe to give far greater clarity over restrictions and quarantines. Shares rose a touch but the rest of the travel sector was weaker with Carnival off another –4 per cent and IAG down –3 per cent after a drubbing yesterday.
Kingfisher enjoyed a strong recovery in Q2 as DIYers tackled their jobs lists. This recovery has continued into Q3 to date, management say, with growth across all banners and categories. Q3 20/21 group LFL sales to Sep 19th are up 16.6 per cent. DIYers are driving the recovery – sales at B&Q rose 28 per cent in Q2 on a like-for-like basis. Trade less so – Screwfix LFL sales were up just 2.4 per cent, though they are +9.9 per cent in Q3 so far – as the construction industry struggles to get going again. Overall UK & Ireland sales rose 2.4 per cent in the first half despite lockdown as people rediscovered their homes and their desire for improving them. French bounced back strongly, with Q2 sales +27 per cent vs the –41.5 per cent decline in Q1. First half sales were –5.9 per cent lower. Overall H1 sales were a tad lighter but cost reductions meant adjusted pre-tax profit rose 23 per cent to £415m, with retail margins +140bps to 9 per cent. Shares rose 6 per cent in early trade and have more than doubled off the March low.
In FX, the rollover in risk sentiment and some interesting Fed jawboning played into the dollar bulls, with DXY sustaining a breach of the channel on the upside and clearing its 50–day SMA, which had been a key point of resistance last week. Gold retreated under $1,900 at one point with the stronger dollar weighing. The Fed’s Bullard said the US has done enough on the fiscal front, whilst Dallas Fed president Kaplan stressed that the Fed should not keep its hands tied by committing to ZIRP forever even if the economy bounces back. Powell stressed that the Fed will use all its tools to do whatever it takes.
More Powell today plus Bank of England governor Andrew Bailey, who said in remarks this morning that the recovery in Q3 has been ahead of expectations but stressed that the hard yards are ahead. All the market wants to know is whether negative rates are coming or not – he said the Bank has looked ‘very hard’ at the scope to cut rates further, including negative rates. So this was not the attempt to distance the MPC from the negative rate comments in last week’s release to give the central bank more flexibility. As the MPC indicated last week, Bailey wants to leave negative rates on the table.
GBPUSD was under fresh pressure under 1.28 and could be set up for a bear flag continuation with a possible dive back to 1.22. If this holds, bulls need to clear 1.30 to be encouraged. The key test is the 200-day EMA around 1.2760 which was tested last week and held, encouraging a rally back to 1.30. Cable shed this support in the early European session as Bailey got on the airwaves – one to watch today with the 100-day the last line of defence.
Neil Wilson is chief markets analyst at Markets.com
