Lockdowns across Europe seem fully discounted now – markets haven’t really reacted massively to the UK government’s caprice. Stocks hugged the flatline in early trade Monday as all eyes shift to the presidential election, with some bid actually coming through after the initial downtick. The elephant in the Oval Office is Donald Trump: a victory in the election this week for the incumbent would surprise just about everyone. I say this since strategists everywhere seem to be discounting the possibility. Some of the pre-election selling we have seen could be more about an expected Biden win and what that would do to tax and regulation. Polls show a healthy Biden lead for sure, but are tighter in the battleground states. Moreover, there is likely a silent group of shy Trump supporters who would never admit to voting for the president. On the other hand, Biden has a clear lead in four key states – Wisconsin, Pennsylvania, Arizona and Florida, a new poll shows, which would see the Democrat through with ease. It’s still a contest though, and with states being called or mis-called on inaccurate exit poll figures throughout the election night we ought to prepare for some significant volatility over the course of the evening.
The main thing Wall Street wants is to get the election out of the way and get some clarity. As such a contested election would present the greatest near-term risk to equities, which may be reflected partially by the Vix going above 40 last week. This is a level that needs to be watched, though returns post a spike like this tend to be positive.
But investors may not get the result on election night. The sheer volume of mail-in votes in those states which require counting to only start from Nov 3rd (Michigan, Pennsylvania), could delay the result even without the risk of legal action. Donald Trump is clear he’s going to fight where he can, saying in reference to Pennsylvania: “The night of — as soon as that election is over — we are going in with our lawyers.” Now there is a very large difference between a delayed result and a contested result, but the latter would almost inevitably ensue from the former as it all centres on the legality of postal votes. The worry for investors is that neither side accepts defeat.
As detailed in our election playbook, in the event of a Democrat clean sweep, whilst it would generate a large amount of fiscal stimulus (+ve for stocks) the expected hike to corporate taxes and capital gains tax creates policy uncertainty and could generate additional volatility into the year-end as investors liquidate positions to realise returns prior to the tax rises. There is also chatter about a financial transactions tax, which would be a negative for risk.
And, moreover, there is a key question that will remain unanswered this year if Biden cleans up: Will the gigantic stimulus that the Democrats will unleash flood the US economy with too much liquidity at a time of strong economic recovery, creating inflation and leading to monetary policy uncertainty? In other words, do we get so much fiscal stimulus that the Fed becomes cornered and is forced into hiking rates much sooner than planned?
Stocks closed out a bad week on Friday in the red again, with the S&P down 1.2 per cent. There was a decent bull rally into the close though to leave it 36pts above the low at 3,270. European stocks were mixed in early trade on Monday.
The new lockdown in England is a big problem for some and good news for others – the slow recovery from the crisis just took a giant step backwards, but online will do well. Primark owner Associated British Foods warned it will suffer £375m in lost sales as a result of stores being closed here and across Europe in November, but this assumes 2 December will be the day restrictions are lifted. If I were a betting man, I'd say it’s more likely to later, despite what the chancellor says. Shares fell 3 per cent. Meanwhile Ocado shares jumped 8 per cent as it raised its full year earnings guidance to £60m from £40m. This should be a positive for Marks & Spencer but it’s lower this morning. Just as the first lockdown accelerated online shopping habits, the second lockdown will undoubtedly offers some additional near-tern support for Ocado stock.
UK Company Announcements
| Lloyds (LLOY), Natwest (NWG), Barclays (BARC) | Shares in the largest UK-focused banks are down today, after the Financial Conduct Authority proposed that mortgage owners yet to request a payment holiday should now be allowed to ask for one. The regulator has suggested similar support measures for consumer credit products. |
| Ryanair (RYA) | Ryanair recorded a pre-tax loss of €432m over its first half, with the near-total grounding of its fleet between mid-March to the end of June helping to drive down passenger traffic from 86m to 17m. |
| Serco (SRP) | The Ministry of Defence (MoD) has cut short its 25-year contract to develop and maintain warheads for the UK’s Trident nuclear deterrent and will take it back in-house from June next year. Serco currently provides these services as part of the ‘Atomic Weapons Establishment’ (AWE) joint venture with Lockheed Martin (US:LMT) and Jacobs Engineering (US:J). AWE is expected to contribute £17m to the group’s underlying trading profit this year and Serco says despite the contract loss, its profit in 2021 will remain in line with analyst consensus. The shares are down 12 per cent in early trading. |
| Hiscox (HSX) | Pandemic-linked claims, currently at $387m, assume "current restrictions on travel and mass gatherings continue until the end of the year", the insurer has reminded investors. Should these restrictions continue in 2021, Hiscox could be on the hook for up to $40m in further event cancellations costs. |
| Lok'n Store (LOK) | Adjusted cash profits were up a tenth during the year to July thanks to increased occupancy combined with stable pricing for the self-storage specialist. Management recommended a further rise in the dividend, which resulted in annual payout of 13p a share. |
| Purplebricks (PURP) | As activity in the housing market continues to surge thanks to the government's stamp duty holiday, the estate agency has revealed that it expects adjusted cash profits for the first half of the year to be "comfortably ahead" of company expectations of £3.5m. |
| Yamana Gold (AUY) | In a C$152m (£89m) cash and share deal, the gold miner will buy out explorer Monarch Gold for its Wasamac project in Quebec. The company was up 4 per cent in early trading, although has little liquidity in London. |
| PPHE Hotel Group (PPH) | The hotel operator's revenues for its nine months to the end of September sat two-thirds down on last year's level, at £93m. Room occupancy sat at a third for the period. |
| NWF (NWF) | The food and fuel distributor's shares have been suspended from trading after the group was subject to cyber attacks in its fuel and feeds divisions. |
| Ocado (OCDO) | Ocado has lifted its forecast for its full-year cash profits from £40m to above £60m, following a strong start to its partnership with Marks & Spencer (MKS). Ocado also announced a $287m outlay on the acquisitions of two robotics companies. |
| Superdry (SDRY) | Superdry has announced the appointment of a new interim chief financial officer. Benedict Smith was previously interim CFO at Dennis Publishing Group. |
| Howden Joinery (HWDN) | The kitchens supplier has recorded an uplift in sales since lockdown wrecked its second quarter. Sales were up 2.2 per cent between 14 June and 31 October compared with last year, while revenue has since accelerated and its up by a tenth compared with 2019. |
| Associated British Foods (ABF) | Ahead of the Primark owner's full-year results announcement tomorrow, ABF announced that more than half of its retail space would be closed once English lockdown measures commence, causing a £375m loss in sales for these outlets. |
The US dollar remains well bid above 94 after breaking out of the October range and it looks to test the upside of the sideways channel formed by the September peak at 94.82. Dollar strength pushed cable back to 1.2860, with Brexit barely being mentioned right now despite the very tight timetable. Expect some headlines this week on that front to disrupt. We also have the Federal Reserve and Bank of England meetings to contend with. Lots of chatter around negative rates but the MPC is much more likely to deliver a QE boost to support the economy. The decision to lock down the economy in November gives all the cover the central bank needs to do more. Data like the nonfarm payrolls and global PMIs this week can be largely ignored now we’re clearly into a new phase of the pandemic lockdowns and the election will dominate.
Neil Wilson is chief markets analyst at Markets.com
