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Oil price rebound helps stabilise European markets, US jobless claims in focus

01-6-2020 10:14:53It seems utterly perverse that having seen a decent rebound into the end of March that markets should freak out on comments from President Trump that the US could well be in for a bad couple of weeks as coronavirus cases increase in the US.

Based on our experience here in the UK and Europe, its likely to be the start of a bad couple of months, never mind weeks, something that was directly alluded to by US Vice President Mike Pence when he compared the situation in the US to the direction of travel for Italy.

We still appear to be in the foothills of this particular crisis as indicated by the extension of lockdowns in Germany and Italy, yesterday with the likelihood that the lockdown in the UK will be similarly extended in the coming days.

What is more worrying is that there appears to be a second wave of infections in China, which would appear to suggest that even if we get on top of this particular outbreak, some levels of restrictions are likely to remain for quite some time, which in turn will mean that even when we come out of the current lockdown, any economic rebound is likely to be akin to driving away in a car with the handbrake on.  

The drag on markets yesterday wasn’t helped by continued weakness in the oil price, however we do appear to be seeing some gains in that regard this morning on a couple of headlines that China will start topping up its state reserves, and that Saudi Arabia is supporting co-operation amongst oil producers to stabilise oil markets. These gains are helping support rebounds in Royal Dutch Shell and BP’s share price, as well as a modest stabilisation in early trading for European markets.

This morning the FCA announced that distressed credit card consumers should get a three-month payment holiday on credit cards, personal loans etc, and these should be charged at a "reasonable rate of interest". Of course, this depends on what the definition of “reasonable” is, given that credit card companies will have a higher number in mind, while consumers will have a lower number.

We’ve seen some more Covid-19 trading updates this morning with British Gas owner Centrica the latest to cut its dividend, though this has been long overdue given the recent problems at the business and the declines in the share price. The company announced that they would be cutting capex by £400m as well as cutting bonuses for board members, due to the uncertainty around the financial impacts of the virus. The company has also paused the Spirit Energy divestment process

National Grid has also given a pre close update ahead of its full year results and has said it hasn’t as yet seen any material impact as a result of Covid-19 and that financial performance is expected to be in line with previous guidance. Management have indicated that they may see higher operating costs in the US, while keeping their options open regarding the payment of a dividend.  

Commercial property and real estate companies have taken an absolute battering in recent months, as retailers close down and rents get deferred or reduced by struggling retail businesses. Land Securities also owns office space as well as hotels, giving it a much more diverse footprint, and this morning became the latest company to outline the damage caused by the current shutdown.

For example, Accor the French hotel chain have closed 15 of the 21 hotels in the Land Securities portfolio, while a lot of the company’s retail assets have also been closed down. As a result of this diversity of property assets, 65% of the rent due on 25th March has been paid, compared to 96% a year ago, still a lower number but quite a bit higher than some of its peers.

A total of £121m of rent was outstanding as at 25th March with the biggest drop coming in retail compared to a year before.

Bunzl, the specialist distribution and services logistics group has also announced its latest Q1 update and it’s been a solid quarter with good growth across grocery, healthcare and cleaning and hygiene. The picture is less positive in retail and food service, which accounts for about 35% of group revenue, however that hasn’t prevented total revenues seeing an increase of 6%.

Despite this outlook, management have declined to provide guidance, due to the uncertainty around the possible future impact of Covid-19 on trading.  

Cruise ship owner Carnival’s shares are sharply lower this morning as the details around the sales of its bond sales become clearer. This morning the company confirmed it had managed to sell $4bn worth of secured notes, due in 2023, at a hefty 11.5%, as it looks to raise cash to keep the business afloat. That seems a pretty hefty premium given where interest rates are at the moment, but it also is hugely instructive with respect to how much of a risk premium the market is demanding to put the money in.   

Saga Group is also lower after announcing that it could suspend all cruises and holidays until 2021 under a worst-case scenario. The company also announced an impairment charge of £370m, while revenues for the full year could be lower by as much as 65%. The company withdrew its dividend and has applied for a waiver of its debt covenants until March 2021.

The main focus this week has been on the jobs market and in particular the US labour market with the March payrolls report due tomorrow. Yesterday’s ADP report was better than expected with a decline of 27k jobs however that seriously underestimated what is coming our way with respect to the jobs market, not only in the US but globally.

This morning Spain announced that a record 302k people had applied for jobless claims, while here in the UK universal credit applications are skyrocketing, with over 1m applications in the last two weeks.

Today’s weekly jobless claims in the US are expected to be similarly eye watering after last weeks 3.3m number, with another number in excess of 3.5m expected. How that will impact tomorrows US jobs report is anyone’s guess but what we do know is that it will be a negative number, with a big jump in the unemployment rate.

Concerns over the prolonged economic impact on the US economy saw US markets sink sharply yesterday, with US Vice President Mike Pence’s comparisons to Italy unlikely to have helped sentiment. Despite this we could see a modest rebound on the open as we look ahead to tomorrows services PMI numbers and jobs data.

On the earnings front US pharmaceutical chain Walgreens Boots has seen its share price come under pressure over the last few months, sinking to five-year lows earlier in March. It is now on the front line of the response to coronavirus in the US and the UK, as its pharmacies gear up to find test kits and masks, gloves and other protective gear for health workers and others. Walgreens is also likely to have seen record sales of hand sanitiser and other related hygiene and flu products like Tylenol or other paracetamol products. Profits are expected to come in at $1.456c a share.   

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