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Market Outlook: Markets navigate the Ro-Rotation trade, Sterling rises, BAE, JD Wetherspoon & more

Traders in London are taking something of a breather after a hectic couple of days trading with UK indices becalmed in early trade
November 11, 2020

The risk-on rotation trade continues to have legs for the time being but we could see this suffer a bit of payback before long. Yesterday it was still very much the driving force as the Nasdaq 100 fell almost 2 per cent and the Russell 2000 small cap index rallied over 1.7 per cent. That left the S&P 500 almost flat for the session, closing a shade lower at 3,545. US Treasury yields rose, with 10s approaching the psychologically important 1 per cent barrier. US bond markets are closed today for the Veterans Day holiday and there is an empty data roster ahead, though we will be watching Christine Lagarde’s speech later. Donald Trump continues to refuse conceding the election and Republicans are closing ranks around the president as they eye two Senate runoff races in Georgia. They know they need the Trump appeal to get the vote. Have markets been too sanguine about an impending constitutional crisis?

European markets were firmer again in early trade on Wednesday, with the FTSE 100 clearing 6,300 to hit its highest since the middle of June and it now trades above its 200-day simple moving for the first time since late February. A close above the 6,340 brings 6,500 and the post-selloff peak into view. However it’s a bit more complex today than being all about the reopening trade – this week’s big gainers like Rolls-Royce and Compass Group are down, whilst Ocado, Kingfisher and Just Eat have risen. Rotation is not going to be a straight line – this reopening move is taking a bit of a hit this morning. After the initial kneejerk, investors will need to work out now which ‘value’ stocks remain value traps and which have some growth in them. Expect pullbacks along the way but the overall landscape remains much more positive than it was a week ago for these sectors worst affected by the pandemic.

Chart: FTSE breaking free, eyes post-trough highs. 

UK Company Announcements

 

BAE Systems (BA.)

Underlying EPS for the year to 31 December is now expected to be slightly better than previous guidance – the group had been anticipating a mid-single digit percentage lower than the 45.8p it saw in 2019. This is thanks to “a good operational performance” against its order backlog and an expected lower tax rate offsetting foreign exchange headwinds.

JD Wetherspoon (JDW)

Sales fell by 28 per cent in the group's 15 weeks to 8 November, while the group estimated its cash burn during its month of closure at around £14m. Chairman Tim Martin warned of lthe threat of lasting restrictions on the sector. "Veterans of the industry will recall that the afternoon closing of pubs between about 3pm and 6pm was imposed in the First World War," he said, "but the requirement for afternoon closing was only abolished in 1986."

Great Portland Estates (GPOR)

Retail assets continued to weigh on the value of the portfolio, which declined 6.6 per cent during the first half and pushed the commercial landlord into a £155m operating loss. The retail portfolio was also responsible for the shortfall in rent collection, with 72 per cent (excluding deposits) received for the final quarter.

Workspace (WKP)

Like-for-like occupancy declined almost 8 per cent over the first half, while discounts given to customers also resulted in net rental income declining by more than a third. A devaluation in the portfolio also pushed the flexible workspace provider into a pre-tax loss.

Tiziana Life Sciences (TILS)

New collaboration with Parexel Biotech to conduct clinical trials in patients with Crohn's Disease, using take-home capsules of Foralumab, with the potential to be a safer and effective alternative to intravenous immunotherapies

Ricardo (RCDO)

Alongside £27.5m from a placing and subscription, the group is looking to raise £7.2m via a retail offer on PrimaryBid.com. The 333p offer price is a 10 per cent discount to the closing price on 10 November. The proceeds will be used to pay down drawn debt facilities and reduce leverage. The fundraise comes as order intake in the three months to 30 September increased by almost a fifth to £105m. However, orders that are workable in the short term are expected to remain at a low level amid weaker automotive and industrial markets.

Flutter Entertainment (FLTR)

The gambling operator raised its ex-US profit guidance to a range of £1.28bn to £1.35bn from a previous bracket of £1.18bn to £1.33bn. Overall turnover lifted by 30 per cent over its third quarter, with sports revenues experiencing a particularly strong increase, having grown by a third compared to the same period last year. PokerStars activity has normalised after a red hot first half, during which its turnover lifted by 40 per cent. Higher investment in the US towards growing its customer base will culminate in deeper losses of up to £180m from a previously envisaged limit of £160m.

Sterling is making solid gains as Brexit talks continue and head towards, we hope, some conclusion. GBPUSD trades with a bullish bias towards 1.33, its highest since September. EURGBP broke below 0.89 and trades under its 200-day simple and exponential moving averages – a key area of support. Sterling is thought to be among the biggest beneficiaries of a vaccine since the UK economy seems to have been hit hardest by the lockdown among the G10. What’s less clear is whether sterling bulls get caught offside by a breakdown in Brexit talks before ultimately a deal is sealed at the last minute. They might be right but their timing may be wrong.


Chart: EURGBP sows downside momentum after closing under 200-day EMA.

The Reserve Bank of New Zealand left rates on hold at 0.25 per cent and signalled they would stay there until March 2021. The central bank also met expectations for more stimulus by launching its Funding for Lending Programme, which will allow it to cut to negative should it require to - but a forecast upgrade for inflation to reach 0.9 per cent in Dec 2021 vs the prior 0.3 per cent expected signals the RBNZ is not about to go negative. With broad USD weakness underpinning the risk-on crosses, the kiwi rallied as markets pared bets for negative rates. NZDUSD hit 0.69, nearing the March 2019 peaks around 0.6940.  

Chart: Kiwi tests March 2019 highs

Elsewhere, crude oil continues to make gains with WTI (Dec) breaking free of the $41.50 range to test the next big level at $42.50 with momentum going one way in the aftermath of the Nov 2nd outside day reversal. API data showed crude oil stocks fell by 5.1m barrels last week, much more than analysts had expected. Whilst inventories are still muddied by the hurricane-affected shut-ins on the Gulf of Mexico, crude prices are riding the Pfizer-led risk rally. Nevertheless, near term supply pressures and lockdowns ought to be weighing on demand in the next few months. Expect a significant amount of chatter around the OPEC+ deal ahead of the meeting starting Nov 30th.

Neil Wilson is chief markets analyst at Markets.com