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Updated Market Outlook: Vaccine news boosts markets, Biden declared president-elect, stocks rally, National Grid, G4S & more

Shares in London have built on election relief with a surge on the back of positive Covid vaccine news
November 9, 2020

Updated 13.30

Stocks have rallied on news that we could soon have an effective vaccine against Covid-19. Initial optimism is exceedingly high and could fade – we should not be jumping any guns here - but ultimately a vaccine that works effectively would be good for the economy and favours the cyclical parts of the market that we thought were going to struggle as a split Congress meant less stimulus. A working vaccine is positive for cyclicals and value – the reopening trade essentially. The dichotomy in the market is stark: the biggest gainers in a frantic session today are among those stocks worst hit by the pandemic – travel and leisure chiefly, whilst Covid winners are doing poorly. We should be careful in overreacting – but it’s clear the market is forward looking and pricing in recovery in a number of beaten-down areas next year. 

Several questions remain, which won’t be answered right away. When does the vaccine get rolled out fully? So how quickly are we ‘back to normal’ effectively? The UK has pre-ordered 30m doses of the vaccine, but what about other countries?

Given the US election result, does this make it harder to agree stimulus that is required now for the economy?

If this is a higher yield, higher inflation world, how does the Fed start to adjust? Will it even consider thinking about thinking about raising rates? Lots of Fed speakers this week to frantically rewrite their speeches.

WINNERS  

Major indices (ex-Nasdaq). The Dow is surging 1,500pts and set to open at a record high. The FTSE 100 is up over 5 per cent with all sectors green, led by energy and financial and Utilities, Tech and Healthcare at the bottom but still positive as the news lifted the boats.

Travel stocks like IAG +30 per cent and EasyJet +26 per cent are among the best risers on the UK market, whilst Rolls-Royce +46 per cent led the charge. Cineworld +47 per cent and Carnival +31 per cent also indicative of a major rotation back into these stocks that have been hardest hit by the pandemic. In the case of Cineworld the 9.4 per cent stock out on loan points to a nasty short squeeze that may exaggerate the move. 

Pubs and restaurants like JDW +15 per cent and Restaurant Group +26 per cent were among the other big gainers from the news. Back to normal means back to the pub – happy days! 

Energy: A vaccine should help boost demand more quickly. As crude prices rallied, Shell +12 per cent and BP +15 per cent boosted the FTSE 100. 

Financials. A vaccine is a yield steepener – Lloyds and Barclays both +10 per cent. 

Crude oil naturally rose on expectations that a working vaccine will equate to a swifter demand recovery, at least much quicker than we would have thought only yesterday.

LOSERS 

Covid winnersStocks that won because of the pandemic are naturally on the hook. Stay at home and WFH stocks fell, hurting the Nasdaq. Zoom –15 per cent and Peloton –11 per cent pre-market is indicative of the rotation out of these Covid winners into reopening trades.

UK stocks in the red included the main winners from the pandemic – Ocado, Fresnillo and Kingfisher (back to normal means no DIY – oh happy days)

Bonds – US Treasuries were offered with the 10-year yield spiking north of 0.92 per cent. Inflation could come through next year with large excess savings to be deployed in many sectors of the economy, notably in travel

Gold – higher yields weighed on gold prices, though we would expect inflation expectations to rise and this could offer ongoing support to prices.

 

 

10AM: Joe Biden has been declared president-elect, but Donald Trump is refusing to concede. Markets are not particularly fussed and see some clear light – relative clarity is providing a boost to risk assets. Stocks enjoyed the best week since April, though there was some payback on Friday as traders consolidated gains. The S&P 500 rallied 7 per cent over the five sessions, but this did come after just about the worst pre-election week for stocks on record. Investors were shifting a lot of flow into lower volatility debt markets ahead of the election to reduce exposure to stock market volatility, and this is now unwinding back into equities. In particular, the Biden White House and split Congress ought to mean lower rates, lower inflation and this benefits growth stocks, and gold. The dollar index has slumped to its weakest since September 1st, the two-and-a-half-year low, but tried to rally early on Monday.  A weaker dollar is supportive for gold, which broke out past $1,950. WTI (Dec) tracked sideways around the $38 mark.  

Read our analysis of what the election result could mean for companies. 

Stocks in Asia rose, with the Nikkei up 2 per cent and Hang Seng rising over 1 per cent. Stocks opened firmer in Europe with the bullish trend asserting itself as Biden’s triumph seems all but assured. The FTSE 100 rallied 1.5 per cent to 6,000, whilst the DAX rose 1.7 per cent to 12,700 and the Stoxx 50 returned to 3,250. US futures indicate Wall Street will open higher after a lacklustre session on Friday.

IC Alpha subscribers can find out here from Phil Oakley why the election result will not mask the stock market's wider problems. 

UK Company Announcements 

National Grid (NG.)

A report in The Telegraph over the weekend suggested that there is growing support among the government and regulator Ofgem to transfer National Grid’s responsibilities as the ‘electricity system operator’ (ESO) to an independent body. This would be to address potential conflicts of interest with the rest of the business as the UK shifts towards net zero emissions. If this breakup were to transpire, analysts at Jefferies envisage a “limited financial impact” as the ESO contributes less than 5 per cent of group profits.

G4S (GFS)

GardaWorld has extended the acceptance deadline for its 190p per share hostile takeover offer until 28 November. The move comes as just 1.72 per cent of shareholders accepted the bid by the original 7 November deadline, which includes the 1.55 per cent stake that GardaWorld itself owns. G4S says the low level of shareholder approval “is consistent with the derisory level of GardaWorld’s offer.” We continue to recommend shareholders reject this offer, particularly as US rival Allied Universal is also circling.

Breedon (BREE)

The group’s £178m acquisition of 100 sites from buildings material supplier Cemex (US:CX) had sparked an investigation from the Competition and Market Authority (CMA). But in order to satisfy the CMA’s concerns, Breedon has now struck an agreement to dispose of 14 of its own sites to Tillcoultry Quarries for £12m. This should allow the integration of the CEMEX assets to proceed.

Dignity (DTY)

Dignity's underlying operating profits for the year had fallen 8 per cent by the end of its third quarter to £44.2m, despite revenues rising by 4 per cent to £234.5m. Lower average pricing has offset the contribution of more deaths this year, while Dignity is preparing for the introduction of a Financial Conduct Authority regulatory framework of the 'pre-need' funeral industry by the middle of 2022. Dignity shares leapt in August after the Competition and Markets Authority delayed plans to introduce price caps, with its final report due by 27 March 2021.

Ultra Electronics (ULE)

Overall trading for the nine months to 30 September is said to have been in line with expectations, although operating margins have been slightly better than anticipated due to lower indirect costs. While challenging conditions in commercial aerospace are likely to continue into 2021, the group says that its core defence markets remain “robust”.

Bunzl (BNZL)

The group is set to acquire Brazilian protective equipment distributor SP Equipamentos for £22m. The deal is expected to complete in November and will broaden Bunzl’s footprint across the safety products market. The group has spent more than £400m on acquisitions so far this year and is in active discussions with further targets.

Taylor Wimpey (TW.)

Strong sales volumes combined with cost savings means management expects 2021 operating profits to be materially above the top-end of the consensus range of £626m, while 2020 profits will be at the upper-end of the £242-292m guidance previously given. The sales rate since the end of June to date was 0.76 homes per outlet per week.

Bushveld Minerals (BMN)

Private equity firm Orion Mine Finance has taken all of a $35m (£27m) convertible loan note issue from Bushveld, a turnaround from the September announcement in which the vanadium miner said Orion would take a maximum of $20m of the offering. Orion has separately handed over $30m in a ‘production financing agreement’, although it is the convertible notes that would see it become a major shareholder of Bushveld.

Kosmos Energy (KOS)

While posting a net loss of $37m in the September quarter, the oil and gas company has said it would finance its share of the BP-operated Greater Tortue Ahmeyim project in Mauritania and Senegal. This had previously been part of a farm-down plan.

Countrywide (CWD)

UK estate agency Connells has approached the group with a 250p a share takeover offer, which management said was at at an early stage. The offer is a 72 per cent premium to the closing share price on Friday.

S4 Capital (SFOR)

The digital marketing company’s gross profits grew by 23 per cent in the third quarter compared to the same period last year, as it edges closer to its target of doubling its top and bottom line organically in three years by 2021.

Codemasters (CDM)

The video game developer confirmed on Friday afternoon that it received a buyout offer from US big fish Take-Two Interactive (US:TTWO) for £739m. The board intends to recommend the offer, which valued shares at a 12 per cent premium to the closing price on Thursday.

TP ICAP (TCAP)

Following a pickup in activity in its core business in October, the interdealer broker now expects full-year revenues to match 2019. However, a 19 per cent drop in third quarter revenues to £388m helps explain why the group is putting all its hopes on the acquisition of Liquidnet.

It would take a lot of big and unlikely legal victories for Trump to turn the result now. Recounts are likely as are multiple legal actions – but the lead for Biden is such that it would imply some enormous voter fraud in several states. Safe Harbor Day is 8 December, by which date all states need to have decided who’s won ahead of the Electoral College votes on 14 December. 


The MSCI All Country World Index hit a record intra-day high this morning. A Biden win is seen to be much better for international cooperation, an end to the Trump-era isolation and critically, good for trade with the potential for a reset in transatlantic relations probably the most exciting aspect for investors. Whilst the Democrats won’t go easy on China, the relationship is expected to be steadier and escalation of tariffs seems less likely than under Trump.

According to weekend data Chinese exports jumped 11.4 per cent in October, whilst imports rose 4.7 per cent in USD terms. This was the best export performance since the pandemic and shows the recovery taking place outside of those countries where lockdowns linger. It’s a good indicator that global demand is picking up in spite of pandemic restrictions in certain areas. This morning saw some decent German export numbers for September (+2.3 per cent), but France’s economy is operating down 12 per cent in November due to the lockdown. 

After the relief rally, where next? The Senate looks to be heading for Republican control, which removes a lot of the regulatory and tax overhang. Georgia run-offs will keep us unsure for a while longer, but the odds favour a very slim Republican majority in the upper house. Gridlock could be good for multiples and earnings longer term, but it’s not conducive to a large stimulus package right now. And will Biden go for a more aggressive approach to containing coronavirus? We know that the greater the restrictions the greater the economic damage. Europe is enduring this reality again. A Biden win is probably good news for clean energy companies – the president-elect is committed to re-joining the Paris Climate Accord. Scottish Widows is offloading £440m in ESG unfriendly investments – the wind is blowing only one way.

Sterling was holding well above $1.31 but dollar weakness aside, the pound remains susceptible to a significant amount of Brexit headline risk. Boris Johnson and Ursula von der Leyen said 'significant differences remain' in trade talks, citing fishing and the provisions for a level playing field. All the showboating and posturing should give way to pragmatism and the realpolitik of securing a deal before the New Year. The current ‘deadline’ is November 15th but talks could well extend beyond this. After tapping on 1.32 briefly early doors, GBPUSD dropped to 1.3140 by around 9am.  

Chart: The FTSE 100 hit 6,000 and seems to have broken the downtrend. Next to 6,300, or will the downtrend reassert itself? The jump this morning marks a clear move off the 50-day simple moving average at 5,888 and the 100-day simple moving average at 6,011 offers resistance.

Neil Wilson is chief markets analyst at Markets.com