Some of the biggest share price gains registered this week have been among companies that have filed for Chapter 11 bankruptcy protection – the likes of Hertz, JC Penney, Pier 1, Whiting Petroleum, as well as firms such as Chesapeake Energy and California Resources – which are about to file for bankruptcy. This is downright speculation, gambling by any other way of it looking at it.
Retail investors – many trading for free with Robinhood accounts – are snapping up penny stocks and driving up the shares of companies whose stock is essentially worthless. Most of these investors probably don’t realise that common stock comes precisely bottom of the pecking order in bankruptcy proceedings. Even if they don’t go bankrupt and restructure, shareholders get wiped out. It’s a sign of a frothy market - just make sure you are not the greater fool holding the stock when the music stops.
Stocks took a breather yesterday with a decent pullback, though European bourses opened a little higher this morning ahead of the Federal Reserve statement this evening. Asian shares were mixed, with Tokyo a tad higher and Chinese shares a little weaker.
Chinese inflation figures were soft, with producer prices down 3.7 per cent, the worst drop in four years, and consumer prices rising by 2.4 per cent, down from 3.3 per cent in April. Meanwhile, data crossing this morning showed French industrial production declined 34 per cent in April – but the market long ago chose to ignore any backward-looking data.
European stocks opened higher after yesterday’s sell-off, now bouncing around ranges before there is more clarity on economic recovery and any further policy support. On the former, there are concerns about two-consecutive days of record numbers of hospitalisations in Texas as lockdown restrictions lift, but broadly optimism about reopening is trumping doubts about second waves and a slow, lacklustre recovery. It turns out pubs won’t reopen by 22 June, but the bigger worry is how you get children back to school – that should be a priority.
Meanwhile, I have grave doubts about the state of the UK employment market come the autumn as furlough schemes end and businesses have reopened to a big fall in demand. Such circumstance don’t bode well for civil order, which is already looking strained in places.
UK company announcements
| Company | Announcement |
| HSBC (HSBA) & Standard Chartered (STAN) | Aviva Investors has said it is "uneasy" at the decision to back Beijing's proposed national security law for Hong Kong, in the first sign of major shareholder opposition to the lenders' apparent support for anti-democratic legislation. Other concerned investors should make their views known. |
| Paragon Banking (PAG) | Today's half-year results reveal a £27.7m charge, as the buy-to-let lender weighs falling income and property values on its loan portfolio. Of concern is Paragon's base case scenario, which remains less severe than the Bank of England's assumption. |
| Shaftsebury (SHB) | The steady devaluation in West-End retail properties before Covid-19 struck has intensified amid "current economic uncertainty, more cautious investor sentiment and estimated near-term loss of rental income". Half year results show a 7.9 per cent drop in the value of the wholly-owned portfolio. |
| Lancashire (LRE) | Following fundraisings by Hiscox (HSX) and Beazley (BEZ), the insurer has tapped investors for £277m in an accelerated share placing. Like its peers, Lancashire says it plans to use the cash to take market share, rather than build a warchest for the potential rise in claims facing the sector. |
| Segro (SGRO) | Has raised £680m via a share placing for institutional investors and a retail offer to fund the expansion of its warehouse portfolio. The placing was priced at 820p a share, a 4.5 per cent discount to the closing share price the day the fundraise was announced. |
| LondonMetric (LMP) | Acquired £15m in urban logistics and 'long-income' assets since the end of its March financial year-end and is in legals with a further £80m, after raising £120m via a placing in May. Rent collection has also proven more resilient than many commercial landlords. |
| Restaurant Group (RTN) | Around 125 sites will be closed and rent renegotiations will take place elsewhere. This will largely impact the group's Frankie & Benny's chain, which we earmarked for a downsizing effort in April. |
| VP (VP.) | Brexit and election uncertainty followed by Covid-19 saw revenue dip 5 per cent to £363m in the year to 31 March. But increased margins thanks to cost cutting meant like-for-like adjusted operating profit held steady at £52m. With construction activity improving across April and May, revenue is now at 70 per cent of normal levels. |
On the latter, the Federal Open Market Committee (FOMC) statement is due later today (see yesterday’s note). There has been chatter about yield curve control and more dovish forward guidance, but the Fed may prefer to wait until September before it strikes. The recent recovery should give it time to think, albeit it will be keeping a close watch on longer-dated yields moving up, which may be a worry.
However, I think its focus is keeping a lid on the front end and allowing some steepening should not be a concern. I think I said a year ago that we should no longer pay any attention to the dots – they're meaningless guesses. But there could be some optimists on the FOMC seeking to pencil in a hike in 2022. More broadly, I think the Fed will signal it accepts there will be no V-shaped recovery even if the recent data has been encouraging.
US stocks were weaker as the rally paused for breath with the S&P 500 down 0.78 per cent at 3207. The Dow snapped a six-day winning streak with a 1 per cent fall. The Nasdaq was of course still higher and broke 10,000 for the first time ever. Boeing shares have been on a tear lately but tripped up with a 6 per cent drop as it revealed it delivered just four jets in May and saw another 18 orders cancelled. The International Air Transport Association says 2020 will be the worst year in the history of the aviation industry. Vroom went zoom with a 117 per cent gain on the first day of trading to $47.90. Apple shares rose another 3 per cent to a fresh all-time high on reports it would use its own chips in its devices, helping to drag the Nasdaq into record territory.
In FX the dollar is offered across the board with both risk proxies and the yen making gains. The pound has broken out to fresh three-month highs with GBPUSD clearing 1.2760. EURUSD was higher around 1.1350, trying to take out the 5 June peak at 1.1382. The ECB’s Muller said PEPP needs to be temporary and should not be increased if at all possible. He also said low inflation expectations are a short term risk, so take what he says with a pinch of salt.
Expectations for a dovish Fed may be a factor but we are seeing this as part of an unwinding of the strong dollar pandemic trade that was built on USD liquidity squeeze. Nevertheless, the dollar index continues to make new lows and may well take 95 handle before long having broken down through the last Fib support. Key support is seen around the 94.50/60 area.
Crude oil (Aug) was steady a little above $38, about $2 off Monday’s highs, after API data yesterday showed a surprise build in US crude inventories that has reignited oversupply fears. US crude stocks climbed 8.4m barrels in the week to Jun 5th, vs expectations for a draw of 1.7m barrels. The EIA data today is forecast to show a draw of 1.8m barrels. But the forecasts have been way out for weeks, with an average consensus miss of about 5m barrels, so I wouldn’t be putting too much faith in the expectations.
Natural gas prices spiked aggressively lower overnight and though paring losses are still trading down by around 2% today after the IEA said 2020 would see the largest demand shock in the history of the market.
