European markets stumbled out of the blocks this morning, dropping sharply in response to yesterday’s poor US finish and a weak lead from Asia, with Chinese markets closed for the next few days.
Investors remain concerned about rising energy prices acting as a brake on the wider recovery story, and they should be with European natural gas prices showing little signs of slowing down as they continue to move to new record highs.
Nonetheless, while we’ve got off to a poor start, we have pulled off the lows of the day, which suggests that while there is concern about the outlook, it's not significantly higher than it was earlier this week, as markets continue to search for direction.
The best performers are very much on the defensive side with utilities outperforming. National Grid is higher after announcing that a new renewable energy interconnector between the UK and Norway had started generating power.
We’ve also seen the likes of IAG and Intercontinental Hotels make decent gains, while pharmaceuticals have underperformed today with AstraZeneca shares slipping back on the news that Merck has developed an oral Covid-19 tablet that cuts the risk of hospitalisation and death by up to 50%, although in AstraZeneca’s case that is likely to be less of an issue given that they sell it at cost.
Banks are also a little bit softer as some of the heat comes out of the recent rise in yields.
The extent of the various lockdowns has been laid bare, with today’s preliminary full year results from JD Wetherspoon, which today saw a record loss of £154.7m, sending the shares sharply lower in initial trading, to 10-month lows, although surprisingly we have since recovered to finish higher on the day. Maybe there’s a perception that this is as bad as it gets. The most notable statistic was an almost 40% drop in revenues to £772.6m from £1.26bn in 2020, and down from £1.8bn in 2019.
This shouldn’t be too surprising given that these numbers pretty much encompass the entire period of the last two lockdowns whereas the 2020 numbers only caught the first lockdown period. If anything, they could have been worse were it not for the boost offered by “Eat Out to Help Out” in August and September last year, a statistic which was borne out by the like for like sales number for the first nine weeks of the current fiscal year, which saw an 8.7% decline in sales for this year, compared to the 2020 numbers.
The one silver lining is that there is unlikely to be any further lockdowns, which means the big question now is how the business, and businesses in general react to a new post covid trading environment. This is where the next challenge lies given that employee costs will inevitably increase, as will the cost of product due to supply chain issues. On top of that higher energy costs are also likely to act as a headwind, and that’s before you even consider the thorny issue of vaccine passports, if and when they come up for discussion.
The government will certainly come under pressure to look at the whole issue of business rates as we look to the next tax year, and whether the current 66% business relief morphs into a more coherent tax policy for business in terms of how they are taxed in the future. The next spending review is due on 27 October.
US markets opened higher despite PCE inflation nudging upwards in August, to its highest level in 30 years. US lawmakers will try again to push through a vote on the infrastructure bill after finally agreeing a deal to fund the government until 3 December. However, the gains appear to have melted away quicker than an ice cube in the desert, after the latest ISM manufacturing report showed that prices paid edged up, while employment flatlined.
Merck shares have risen sharply after it announced that its trial of a new Covid-19 tablet reduced the likelihood of death and or hospitalisation by up to 50%. On the flip side of that coin the likes of Moderna, BioNTech, Novavax have all seen big losses, as the prospect that revenues for their own vaccines might be hit if the pill is successful.
Disney shares are higher after settling with Scarlet Johansson after she sued the company over the releasing of “Black Widow” at the same time as pushing it out to cinemas.
In news that will surprise no-one, Exxon Mobil has said that it expects that the recent surge in energy prices will boost Q3 profits by as much as $1.5bn.
The US dollar has slipped back a touch after hitting its highest levels this year yesterday. The losses have been felt the most against the pound which appears to have won a welcome respite after all the recent negativity surrounding it.
Despite today’s losses the greenback has still had a strong week, with its biggest gains coming against the likes of the euro, which has rebounded off its recent lows after CPI inflation jumped to 3.4% in August.
Crude oil prices have continued to soften after reports emerged that OPEC+ might consider going beyond the extra 400,000 barrels a day increase in an attempt to keep a lid on prices, and prevent a scenario that sees demand collapse and prices fall even further.
With OPEC+ due to meet on Monday it would appear that the one thing oil producers fear more than lower prices, is a collapse in demand, which would then precipitate an even bigger drop in prices.
Bitcoin appears to have shrugged off the regulation concerns of a couple of weeks ago, hitting a two-week high, after Fed chair Jay Powell said the US had no plans to ban cryptocurrencies, and that regulation would be the best way to control them.