It seems rather odd that having seen various countries start to ease their lockdown restrictions, that markets should suddenly become spooked by the prospect that any downturn could well be much deeper than feared due to the economic damage being wrought across the global economy caused by various economic shutdowns.
It is even odder that yesterday’s comments by Fed chair Jerome Powell to precisely that effect should accelerate the declines we’ve seen in the past day or so. The likelihood of a V-shaped recovery has been a long shot for quite some time now, and the only surprise is that it’s taken markets so long time to cotton on to what has been quite a high probability in any case.
The tone of Powell’s comments suggest that the US is not particularly keen to go down the negative rates route despite President Trump’s apparent enthusiasm for them. The reluctance of various members of the FOMC to consider negative rates shouldn’t be too much of a surprise given how ruinous they have proved to be for Europe’s banking system and economy in general.
The fact that some people are still talking about the implementation of negative rates in US, speaks to a lack of imagination, as well as the paucity of thinking in the economics profession today in relation to the problems facing the global economy.
Asia markets took their cues from the heavy falls in US markets yesterday, ending the day lower, and while Powell’s comments helped fuel yesterday’s declines, they weren’t the catalyst. This has been that infection rates in countries that have started to lift their lockdowns have started to edge higher, with Germany in particular seeing a sharp rise to the highest levels in the last five days.
Against this backdrop we’ve seen markets here in Europe open sharply lower this morning, as it becomes slowly apparent that the road out of the global coronavirus hell, we are seeing right now is likely to be a long and winding one.
On the plus side the news that an antibody test has been developed by Roche, the Swiss pharmaceutical giant is a welcome development in the fight against the virus, with the government reported to be on the cusp of ordering millions of the test. It would appear that for now the news appears to be getting lost in the fog of negativity that is currently clouding sentiment at the moment.
Once again it is the travel sector that is bearing the brunt with airlines and hotels underperforming led by Intercontinental Hotels, International Consolidated Airlines, Easyjet and Whitbread. The latter is a little surprising given that Premier Inns might well see a boost in the absence of international holidays, if the company is able to take steps to Covid proof their hotels.
The woes that the travel sector has been facing have only been partially reflected in this morning’s latest first half trading update from WH Smith, given it only covers the period up to the 29th February. Its high street operation continued to act as a drag on the wider business with revenues down 5%.
Travel saw an increase of 19% to £432m, while profits came in at £63m. The emergence of Covid-19 has thrown all of this up in the air, as it has severely impacted both the high street business as well as the travel business, with total revenues for April, compared to last year down 85% since the start of the lockdown.
The suspension of business rates is likely to cushion some of the impact while the company has secured a £120m 12-month banking facility from its banks with the option to commit to another 7 months if required. The dividend has also been suspended.
The reopening of the housing market has seen a number of UK house builders outline their plans to tentatively restart their sales operations this week with Persimmon being the latest to do so this morning. Sales offices in England will reopen from tomorrow with strict guidelines on social distancing and hygiene guidelines. In terms of construction activity 65% has been restored since 4th May restart.
In terms of trading 1,351 new reservations were made in the 8 weeks to May 10th.
Hargreaves Lansdown latest trading update shows that despite recent market volatility the business has performed well, with total revenue up 13% to £448.1m, while adding 94,000 new clients, and new business of £4bn for the last four-month period. This was no doubt helped by the upcoming ISA deadline, nonetheless it is still an impressive performance. The board has also said it remained their intention to pay the dividend for the year, pushing the stock to the top of the FTSE100 leader board in early trading.
Private equity group 3i is also higher despite seeing an 80% fall in full year returns to £253m from £1.2bn a year ago. The main impact fell on the company’s investments in retail, travel and automotive, though some of this was offset by outperformance in personal care and medical technology. The pledge to retain the dividend appears to have given the shares a lift in early trading.
The pound has also come under pressure overnight, weighed down by comments from Bank of England governor Andrew Bailey said that the central bank was ready to do whatever it takes to help the UK government overcome the problems facing the UK economy. That appears to have been taken as an indication that the Bank of England might well monetise any new debt the government takes on to deal with the current crisis.
Bond markets don’t appear to be too concerned about this prospect at the moment if two-year gilt yields are any guide, with the UK bond market the latest markets to see negative yields, with the two-year yield currently at -0.03%. Even the 10-year yield has fallen back sharply in the past month or so to be trading back towards the record lows we saw in March. This means the UK government could, if it wanted to, borrow for ten years at 0.21%.
Oil prices have continued to rise, after a decline in US inventories yesterday prompted optimism that demand would continue to rise. Traffic levels in the US do appear to be returning to normal increasing optimism that US driving season may not be as badly hit as first feared a few weeks ago.
US markets look set to open more or less unchanged today ahead of what is expected to be another eye watering weekly jobless claims number. The numbers have been coming down gradually on a weekly basis, however that is cold comfort when the numbers are still in the millions, with another 2.5m expected.
Cisco Systems shares are likely to be in focus after the company reported Q3 revenues and profits above expectations. Revenues were still down from the same period last year, at $12bn, however the company isn’t unique in seeing that, and more importantly the company did provide guidance for Q4, saying that it expected to see decline of around 10% in its revenues for the coming period.