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Market Outlook: HSBC and BP shares rally, European equities struggle

Will the bulls be happy to come in again after yesterday's fall?
Market Outlook: HSBC and BP shares rally, European equities struggle

HSBC dividend hopes rekindled: Shares rallied 6 per cent on upbeat noises from management that it intends to start paying dividends again despite profits falling by a third as lower interest rates bit. In its Q3 statement today the bank said the board will consider whether to pay a “conservative” dividend for 2020. It will depend on regulators – we noted yesterday that shares in UK banks were slow to respond to reports the Bank of England is talking to commercial banks about restarting divis. The prospect of dividends coming back will interest income investors again and with returns cut all over the place, anything that offers yield will be snapped up.

The bank reported profit before tax was down 36 per cent to $3.1bn, mainly from lower revenue, which declined 11 per cent to $11.9bn. Asia was the sole source of positive income as it reported profit before tax of $3.2bn in the third quarter, despite interest rate headwinds. It underlines the fact HSBC’s exposure and reliance on Greater China has been a positive this year in the wake of the pandemic and the economic recovery in that region being swifter than in Europe/US. Cuts to interest rates by central banks left net interest margin at 1.20 per cent, which was down 36 basis points from Q3 2019. Expected credit losses and other credit impairment charges were down $100m to $785m thanks to a steadier outlook for the economy. Loan losses for the full year are seen around the lower end of the $8bn-$13bn range. Whilst banks are now setting aside less for bad loans than they did at the height of the pandemic in the spring, it’s unclear whether fiscal support is only kicking this particular can down the road.  

Management warned specifically about ongoing US-China trade tensions and the uncertainty over the UK withdrawal from the EU. They also warned that the low interest rate environment continues to put pressure on net interest income and will exert further headwinds through the fourth quarter before they are seen stabilising in 2021. 

Are things starting to stabilise at BP? Shares rallied 2 per cent as the company swung back to a profit in the third quarter. Underlying replacement cost profit for the quarter rose to $86m, compared with a loss of $6.7bn for the second quarter of 2020 and down 96 per cent from $2.3bn profit for the third quarter of 2019. BP said the result benefitted from the absence of significant exploration write-offs and recovering oil and gas prices and demand. This was partly offset by a significantly lower oil trading result, the company said. The dividend was maintained at 5.25 cents.  

Fundamentally it’s just really tough to make money with oil prices at these levels – BP’s breakeven is at $42 and Brent today trades at $41 with a negative outlook as demand remains depressed and global inventories build. Whilst oil prices have certainly stabilised since the worst period of volatility in the spring, they have stabilised at materially lower levels than the industry would like.  

Weaker oil prices combined with the catalyst of the pandemic is accelerating the green drive away from reliance on hydrocarbons. The commitment to renewables will require further investment and this may require further divestments. Management say they have agreed or completed transactions for almost half the $25bn target by 2025. Net debt at quarter-end was $40.4bn, down $0.5bn, with company saying it is on course to reach its $35bn target. Gearing at 33 per cent was above last year and higher than where Bernard Looney would really like it to be. 

Stocks in Europe struggled this morning after US markets were down heavily in the previous session and there was a weak handover from Asian equities. Yesterday’s capitulation across equity markets may require a bit more of a wash out before the bulls are happy to come in again – they may even decide to wait for the US election to be over first, although after an hour of trading on Tuesday we have seen the bourses steadily come back to the flatline.

Stimulus seems like a bust before the election after Pelosi and Mnuchin failed to reach agreement on a call on Monday and Mitch McConnell adjourned the Senate until Nov 9th. Pre-election volatility would be expected but this is occurring just as we are seeing the average number of new daily cases of coronavirus in the US hitting a record, with former FDA boss Dr Scott Gottlieb warning of an exponential spread of the virus. Strict lockdowns across Europe and the problem of getting fiscal support where it’s need threatens to create a double dip recession.  

Election jitters, no progress on a stimulus package and surging case numbers culminated in an equity market capitulation yesterday. The S&P 500 declined almost 2 per cent and under the 50-day simple moving average at 3,408, though it rallied off the lows at 3,364 in the last hour to finish at 3,400. Among the volume leaders, Snap declined 4.4 per cent, Apple was flat ahead of Thursday’s earnings and American Airlines dropped over 6 per cent as travel stocks were among the worst performers. Cruise liners sank by 8-9 per cent. 

The situation in Europe was no better, though the FTSE 100 failed to put in a new low. The DAX capitulated with a decline of 3.7 per cent sparked by SAP’s pessimistic outlook and the German market is trading at levels not seen since June.

Earnings to watch out for today
27⁠-⁠Oct Microsoft Corp. Q1 2021 Earnings 
27⁠-⁠Oct Pfizer Inc. Q3 2020 Earnings 
27⁠-⁠Oct Merck Co. Q3 2020 Earnings 
27⁠-⁠Oct Eli Lilly and Co. Q3 2020 Earnings 
27⁠-⁠Oct 3M Co. Q3 2020 Earnings 
27⁠-⁠Oct AMD (Advanced Micro Devices) Inc. Q3 2020 Earnings 
27⁠-⁠Oct Caterpillar Inc. Q3 2020 Earnings 

 

UK company announcements
Whitbread (WTB)

The operator of Premier Inn recorded half-year revenues that sat at just a quarter of last year's income, registering £251m in turnover compared with £1bn in 2019. Whitbread slumped into a pre-tax loss of £725m versus profits of £220m last year.

easyJet (EZJ)

easyJet has raised £306m in fresh liquidity from the sale and leaseback of nine aircraft. The leases will cost the airline £15m a year in total. The deal leaves easyJet with 152 fully-owned aircraft, amounting to 44 per cent of its fleet.

ContourGlobal (GLO)

Reflecting last year's acquisition of two combined heat and power plants in Mexico and the farm-down of its European solar assets, adjusted cash profits (Ebitda) increased by 2 per cent year-on-year in the nine months to 30 September, to $543m (£417m). The group says it remains on track for full year adjusted cash profits of $710m-745m. ContourGlobal has declared a 4.0591¢ for the third quarter which will be paid on 29 December to shareholders on the register at 4 December.

Bloomsbury Publishing (BMY)

Shares were subject to a double-digit mark-up on results day, as the publisher’s interim figures easily outstripped market expectations. The Consumer division had an excellent performance with 17 per cent revenue growth and a £2.1 million increase in profit before tax

Dechra Pharmaceuticals (DPH)

A concise update from the veterinary products group revealed that first-quarter trading has been better than expected – but that the virus’s impact on its markets remains uncertain. Dechra’s AGM takes place today.

Plus500 (PLUS)

A 96 per cent year-on-year rise in third quarter revenues notwithstanding, client income at the spread-betting platform has dipped from the record levels seen in the three months to June. With a warning that this "gradual reduction" has continued into the fourth quarter, the shares are somewhat predictably down this morning.

AA (AA.)

Potential acquirers TowerBrook Capital and Warburg Pincus have been given another month to make an offer for the roadside recovery business, as today's deadline looks to slip away. "Commercial discussions and due diligence are progressing," investors have been told.

St James's Place (STJ)

Following yesterday's intervention from activist investor PrimeStone Capital, the wealth advisory group today outlined a 32 per cent dip in third quarter net inflows to £1.44bn. That means the ratio of net inflows to total funds under management are down this year, even if retention rates are up.

Hastings Group (HSTG)

With the insurer's takeover all-but complete, investors have been advised that share dealing will be suspended on 16 November. The listing will be cancelled the following day.

First Derivatives (FDP)

Shares in the software company are up 3 per cent this morning, after interim results flagged a 49 per cent drop in net debt, signs of resilience in the gross profit margin, and bullish commentary around the ways Covid-19 will accelerate demand for the Aim firm's products.

 

Election Watch

Biden lead cut to 7.8pts nationally but holds at 4.1pts in battlegrounds. Trump trailed Clinton by 2.8pts in the key swing states at this stage in 2016.

 

Elsewhere, while equity markets are volatile, bonds haven’t moved much with US 10-year Treasury yields at 0.80 per cent and 10-year TIPS at –0.91 per cent. With little movement there, gold is finding itself hugging its 21-day SMA and stuck between its 50-day and 100-day moving averages. FX markets remain relatively calm. GBPUSD was steady at 1.30 as Brexit talks continue in London and EURUSD was holding around 1.18 ahead of the ECB meeting this Thursday. US durable goods orders on tap today expected at +0.5 per cent, with core reading seen at +0.3 per cent. 

Neil Wilson is chief markets analyst at Markets.com