Sentiment

Europe underperforms, US banks in focus

CMC Markets

European equity markets are set to finish in the red.

Europe

The mood has been downbeat all day as continued health concerns and rising tensions in relation to China has weighed on stocks. Dealers are still worried about the rate at which the virus is spreading, and seeing as some restrictions are being reintroduced, that is adding to the bearish move too.

The US government has hit out against the Beijing administration in regards to its territorial claims in the South China Sea. This represents the latest development in the frosty relationship between the two largest economies in the world. China isn’t on great terms with the UK either, as earlier today it was announced the British government basically banned Huawei from its 5G network.

The upward move in BP and Royal Dutch Shell its helping the FTSE 100 outperform is eurozone equivalents. 

Ocado shares are in the red today on the back of mixed first half results. Group revenue increased by 23.2% to £1.08 billion. The retail division still accounts for the vast majority of the company’s revenue, and it rose by 27.2% to £1.02 billion. Thanks to the business in Paris and Toronto, the international division saw fees surge by 58% to £73.7 million. Expenses in regards to the expansion was a factor in the 36% fall in EBITDA to £19.8 million. The pre-tax loss narrowed from £147.4 million last year to £40 6 million. Last month the company raised £1 billion from the issue of new shares and convertible bonds, and today it confirmed it will spend £600 million on capital expenditure this year. There was no material change to the overall guidance, while the international business is tipped to see a 40% rise in fees. The stock is lower today but last month it hit a record high so it seems a lot of good news was already baked into the price.

Fevertree issued a trading update. The drinks company confirmed the UK division continued to see positive momentum in both spirits and mixers in off-trade amid the lockdown. The continental European unit has also seen robust sales in the off-trade business. The firm acquired Germany’s Global Drinks Partnerships for €2.6 billion. Trading in the first two months of the new financial year has been in line with expectations.

AO World, the online electrical goods retailer, confirmed that full year revenue increased by 15.9% to £1.04 billion. The annual operating loss narrowed to £3.8 million from £13 million last year. Adjusted earnings jumped by over 50% to £19.6 million. Given the nature of its business model, it saw a jump in demand amid the lockdown and it made significant gains in market share during the period. The company feels the lockdowns has had a major impact on shopping habits and that many consumers will be permanently converted to online shopping, which would bode well for their business. AO World has been encouraged by the revenue performance at its German operation and it still feels it can achieve positive earnings at the division from roughly €250 million in revenue next year.     

Ashmore, the emerging markets focused fund manager said that in June, assets under management (AUM) stood at roughly $83.6 billion. In the fourth quarter AUM increased by $6.8 billion, and that was down to a positive investment performance of $9 billion, and $2.2 billion in outflows. The group cautioned the macroeconomic outlook remains uncertain. 

The decision by the UK government to ban Huawei from the 5G network is likely to be costly for BT and Vodafone. The move will cost the groups money, but they don’t have to make the changes until 2027, and by then they will be updating technology and equipment anyway. BT and Vodafone are up today. 

Halma shares are in the red after the company warned that full year pre-tax profit will be 5-10% below last year’s level.     

US

The S&P 500 is showing a modest rise as the latest reporting season kicked-off. The NASDAQ 100 is underperforming as big tech stocks have tumbled for second day in a row.  

Headline CPI in June jumped to 0.6% from 0.1% in May, and that was in line with economists’ forecasts. The core reading held steady at 1.2%, while the consensus estimate was for it to fall to 1.1%. The fact the core reading remained flat, suggests that demand is holding up. 

JPMorgan shares are barley higher this afternoon on the back of the second-quarter figures. EPS were $1.38, which topped the $1.01 consensus estimate. Revenue came in at $33 billion, while equity analysts were predicting $30.3 billion. The volatility in the financial markets in the past few months helped the revenue in the trading unit to surge by 79% to $9.7 billion – a record level. The revenue from bond and equity trading topped forecasts. The bank set aside $10.47 billion in relation to provisions for bad debts, and that will be a common theme for this reporting season.  

Wells Fargo, is one of the largest mortgage providers in the US, and the bank swung to a second quarter loss of $2.4 billion from a profit of $6.2 billion in the same period last year. It was the first quarterly loss since 2008. The bank set aside $9.5 billion for bad loan provisions and that was the reason why it swung to a loss. The net interest margin – the profit margin from lending – slipped by 33 basis points to 2.25%.

Citigroup set aside $7.9 billion for bad loan provisions. The second quarter numbers topped forecasts. Revenue was $19.77 billion and the consensus estimate was $19.12 billion. EPS came in at 50 cents, while equity analysts were anticipating 28 cents. The trading department performed well as revenue from fixed income, currencies and commodities was $5.60 billion, and that exceeded the $4.59 billion estimate.

Delta Air Lines posted a second quarter loss per share of $9.01. Operating revenue in the three month period slumped by 88% to $1.47 billion. The group warned it could take up to two years for the sector to get back to the pre-pandemic level of business.

Tesla shares are up today as there was chatter the company is going to develop a second factory in China.

FX

GBP/USD is under pressure on the back of the underwhelming UK GDP data. In May, on a monthly basis the economy grew by 1.8%, and that was a big rebound from the -20.5% registered in April. Keep in mind the consensus estimate was 5.5%. The yearly reading for May growth was -24%, and economists were anticipating -20.4%. The office for budget responsibility predicts the economy will contract by 12% in 2020. The body also anticipates that the budget deficit will widen to between 13% and 21% of GDP.  

EUR/USD has been helped by the dip in the US dollar. The US dollar index is lower today, even though sentiment in stocks isn’t great - lately the dollar has rallied when stocks tumbled. The final reading of German CPI for June was 0.8%, unchanged from the preliminary reading and it was a big jump on the 0.5% posted in May. The rise in demand in the eurozone’s largest economy, bodes well for the single currency.     

Commodities

Gold is largely unchanged despite the weaker US dollar and the decline in European equities. Traditionally, the metal has benefitted from both a side in the greenback and a fall in stocks, so it is odd that the metal is largely unchanged today. Even though the commodity is broadly flat today, it is still in its wider positive trend.

WTI and Brent crude oil are mixed today. The energy market took a knock yesterday on the back of chatter that OPEC+ are looking to row back on the very deep production cuts that are in place. In May, the group cut output by 9.7 million barrels per day, and that was driven by a desire to put a floor under the oil market. Oil has lacked volatility recently as it seems that traders are waiting to see what OPEC+ will do next.