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Great expectations, or much ado about nothing, as markets await G7

Great expectations, or much ado about nothing, as markets await G7

Yesterday’s surge higher in US markets has seen markets here in Europe open higher this morning as investors bet that today’s meeting of G7 finance ministers, and central bankers will come up with a joined up and cohesive response to the economic disruption caused by the various coronavirus shutdowns that are likely to impact economic activity over the next few months.

The warning from the OECD yesterday that economic growth could fall to as low as 1.5% for this year certainly predicates some sort of fiscal and monetary policy response, with the RBA getting ahead of the game overnight with a 25bp rate cut, however as previously indicated rate cuts will have little or no effect if not followed up by other measures. The action by the RBA wasn’t entirely unexpected given the twin hits the Australian economy has taken from the bushfires, as well as the problems in China, however it is likely to have little effect without a fiscal response from the Australian government.

Today’s call, which is due to take place at 12:00GMT will be hosted by US Treasury Secretary Steve Mnuchin and Federal Reserve Chairman Jay Powell, with a communique set to be published after the call.

The danger is that today’s meeting fails to deliver in terms of substance, and while warm words may cut the mustard for a day or two, in the absence of any concrete action this rebound may evaporate quicker than water in the desert.

The fear is, to paraphrase two of Britain’s greatest literary giants that for all of the great expectations around today’s announcement it could be much ado about nothing.

What the G7 needs to deliver is not the blunt instrument of lower rates, these are already at record lows, what is needed in these difficult times is ample liquidity to ease credit conditions. Above all else banks will need to be sympathetic on companies that are encountering cash flow problems, allowing them some forbearance or extensions to credit terms. This can take the form of cheap loans, something the ECB is already doing and which they could expand, but above all can get companies over the hump of the current economic disruption.

This seems a high bar and reports this morning that today’s meeting might be high on substance and short on detail could prompt a sharp pullback, given the extent of yesterday’s sharp surge in US markets.

Early movers have seen airline shares move higher after their big losses yesterday with IAG, Lufthansa, and Air France KLM all near the top of their respective indexes. TUI is also a little higher after the company reported it had only seen marginal impact on bookings so far due to the coronavirus.

In company news quality assurance specialist Intertek announced its latest full year numbers which showed a rise in full year revenues of 6.6% to £2.9bn, while operating profits rose by 5.2% to £513.3m. An improvement in operating margins to 17.2% helped drive this improvement, however the company was less optimistic about the outlook, and this has held the shares back a touch.

CEO Andre Lacroix warned that the coronavirus impact how the company performs in the months ahead, and warned that the disruption to client supply chains in China might well have an adverse effect, with little indication as to how much.

International equipment rental company Ashtead also gave an upbeat assessment of its business in its latest Q3 numbers out this morning. Rental revenue was up 11% for Q3 and 13% for the nine months to 31st January, helping push operating profits up to over £1bn, and a pre-tax profit of £947m.

In terms of cash flow the company is in decent shape at £363m, up from £72m in 2019.

CEO Brendan Horgan said that the US business was in good shape, while the business in the UK remained challenging.

UK builders merchant Travis Perkins, who also own the Wickes brand have also announced their full year results. Like for like revenues saw a rise of 3.8% to £6.9bn with operating profits rising by 7.8% to £442m, helped by a recovery in its Wickes business, as it looks to demerge the brand in Q2 of this year.

It’s been a decent year for Greggs with the launch of a new range of vegan products, helping to boost sales by 13.5% to £ 1.17bn, and pre-tax profits by 27.2% to £114.2m. This success prompted management to deliver a £300 bonus to all of their staff earlier this year, amidst much euphoria. Since then the shares have slipped back over concern that the next 12 months might not be as good.

The recent storms in February have impacted trading and management also expressed uncertainty about the outlook given the potential impact of coronavirus.

Aggreko shares have jumped sharply after the company reported that operating profits rose by 10% to £241m, despite an 8% fall in revenues to £1.6bn. The improvement in profits was driven by a 2.4bps rise in operating margins to 14.9%.

In terms of the outlook management expressed optimism with respect to preparations for the 2020 Tokyo Olympics and Paralympics, however this doesn’t take into account that these might be cancelled if the coronavirus outbreak continues into the summer. Unless that happens management have kept their guidance unchanged.

The pound has continued to look weak as the EU and UK outlined their respective positions on a trade deal. Later this morning Bank of England governor Mark Carney will deliver his last press conference to the Treasury Select Committee with MPs keen to hear about what steps the central bank might take with respect to the coronavirus.

About an hour later it is being reported that UK government will be publishing a document setting out plans to deal with a sharp rise in coronavirus cases across the UK.

Despite today’s rise in European markets US markets look set to open slightly softer ahead of today’s G7 announcement, perhaps cautious that it might deliver on market expectations .  

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