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Market Outlook: Equity markets continue September slide, Cineworld, National Express & more

After a brief hiatus, sellers are in the ascendancy again
September 24, 2020

Stock markets in Europe turned lower Thursday after a tough day on Wall Street left the S&P 500 close to correction territory. Six months on and with some big gains locked in, investors are starting to fret over the recovery ahead, with the Fed warning that the US economic recovery would suffer if there is no further stimulus and the UK set for a longer winter of discontent.  On Thursday morning, European equities traded lower but pared early losses after the first hour of trading. Asia was notably weaker. German business confidence improved a fraction. Donald Trump said he could overrule the FDA’s plans to introduce tougher standards for authorising a coronavirus vaccine.

The S&P 500 closed near its lows of the day, falling over 2.3 per cent to 3,236 on broad market weakness as both tech/growth declined alongside cyclicals. The index is close to correction territory again - from its intra-day high at 3,588 the 10 per cent corrective move sits at 3,229, Monday’s low point. On a closing basis, it’s 3,222. What’s remarkable is that through all this selling, Treasuries are unmoved – 10s continue to print around the 0.67 per cent region – why are bonds just not moving through all this equity market selling?  

Whilst we can look at the rampant speculation and excessive valuations in big tech stocks unwinding over the course of September, we are seeing broader declines in other sectors that indicates deteriorating risk sentiment as we head into the autumn. There may be several reasons behind this – less certainty over a vaccine emerging soon, second wave fears, the realisation that consumer confidence and spending in the economy will slump unless governments continue to inject stimulus and the usual volatility before the US election. Trump continues to tease with comments around not committing to a smooth transition of power – of course there is no risk that he would somehow carry out a coup, but equally I fear there is almost no chance the election result will be confirmed on the night. Gore/Bush 2000 seems likely to be repeated but things are far nastier, far more polarised now than then. 

More broadly perhaps we can put the sell-off in equities down to fading momentum in the economic recovery – PMIs are showing weakness, whilst other measures of economic activity indicate a levelling-off after the bounce back over the summer – at the same as there is no fresh stimulus emerging either on the fiscal or the monetary side. Whilst central banks continue to stress that they will do whatever it takes, few additional concrete steps have been taken lately.  Washington appears gridlocked over fiscal support.

Fed speakers issued a series of warnings about the path of recovery in the US. Jay Powell warned Americans would burn through savings and find it harder to sell their homes. Boston Fed president Rosengren warned of a ‘credit crunch’ by the end of the year with community and regional banks likely to come under pressure from more bad loans as businesses are forced to close. Cleveland Fed president Mester also called for more fiscal stimulus to support the fragile recovery. Goldman Sachs lowered its quarter-on-quarter GDP growth estimate for Q4 to 3 per cent from 6 per cent, implying the economy contracting 2.5 per cent in the quarter. Powell and Treasury Sec Mnuchin speak later today. Also watch the weekly jobless claims numbers, with initial claims seen at 845k.

In the UK, chancellor Rishi Sunak is abandoning his planned Budget for a short-term round of targeted measures, which he will announce later today. This is likely to feature more targeted support for sectors like hospitality and travel. It’s clear on both sides of the pond that unless there is more fiscal support, the economic recovery will go into neutral and stall. Only three weeks ago the government implored us to get back to the office to support city centres – what’s strange is that they did this without realising that cases would rise. Their risk tolerance for the spread is extremely low, which indicates a government operating on the fly.

UK Company Announcements

 

Cineworld (CINE)

The cinema operator's shares tumbled 17 per cent after the release of its interim results, in which Cineworld warned that it may have to raise additional funds if the government's tightening of coronavirus restrictions force it to close its estate or delay film releases. Cineworld has already raised $361m in liquidity during the period.

National Express (NEX)

The transport operator is trading slightly ahead of its previous revenue forecast, which suggested turnover would sit at around half of pre-pandemic targets until the close of August. Its UK bus businesses continue to have their costs underwritten by the government, while National Express is now operating two-thirds of its US school bus service.

Avon Rubber (AVON)

The group has been awarded a sole-source contract to develop and supply the next-generation ‘integrated head protection system’ to the US army. Worth up to $93m (£73m), it follows on from an existing contract that is due to end in 2021. Meanwhile, the $130m acquisition of helmet supplier Team Wendy – which was announced earlier this month – is US awaiting regulatory approval and is expected to complete by the end of this year.

United Utilities (UU.)

Revenue for the six months to 30 September is expected to be 5 per cent lower than a year earlier, partly thanks to changes to allowed regulatory returns but also because business closures have seen less water used during the pandemic. With an increase in infrastructure renewal expenditure, underlying operating profit is also guided to fall year-on-year.

Pets at Home (PETS)

The pet retailer and service provider's shares leapt 15 per cent in early trading after upgrading its profit forecasts, ahead of consensus estimates of £73m in pre-tax profits. Sales momentum has continued to grow since the summer in its retail and vet activities, providing double-digit sales growth in its eight weeks to 10 September.

DFS (DFS)

DFS fell into a full-year pre-tax loss of £81.2m, as lower sales caused by the pandemic depressed margins, while the retailer recorded £16.6m in charges linked to the review of its smaller brands.

Mitchells & Butlers (MAB)

The government's Eat Out to Help Out scheme propelled Mitchells & Butler's food sales in August, which rose by a fifth and returned the pub and restaurant group to small like-for-like sales growth for the month. Sales are down 3.1 per cent for the year to 19 September.

Go-Ahead Group (GOG)

The transport operator fell into a pre-tax loss of £0.2m for its year ending 27 June, having racked up £57.1m in exceptional costs linked to asset impairment and restructuring in its bus and German rail activities.

Smiths Group (SMIN)

The group has included the delayed interim dividend of 11p to a final dividend of 24p for a total dividend of 35p per share, down 46 per cent on the prior year, as sales for the conglomerate held firm, while free cash flow was on the rise despite the disruption wrought by Covid-19.

CVS (CVSG)

Like-for-like sales growth of 8 per cent in the first eight months of the full financial year declined to 0.7 per cent because of the ongoing Covid-19 crisis. But the first couple of months of the new year have "been encouraging" and management pointed to the "favourable market and consumer trends" of the animal market.

Dollar strength is weighing on its major peers as well as gold and silver, although the greenback’s advance just paused for a while this morning. Sterling has retreated to its weakest level for two months and is current sitting on the 38.2 per cent retracement with the 100-day line turning into near-term resistance. The pound remains exposed to several strong headwinds, including the risk of a no-deal Brexit, negative rates and a deeper and longer-lasting economic collapse than peers. Meanwhile gold fell below $1850 and has retreated 10 per cent from the recent all-time high but found support at the 100-day DMA. Silver has broken the trend line after some very nasty price action over the last few days, but it too has found support around its 100-day line.

Cable holds 1.2690 for now, 100-day line becomes resistance.

 Dollar index advances with three white soldiers candle formation and possible gap close to 96? 

Silver tests 100-day line

 

 

Neil Wilson is chief markets analyst at Markets.com