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Slow start for Europe, after mixed Asia session

It’s been a subdued start for European markets this morning after a similarly mixed session for markets in Asia, as investors take stock after recent gains.

The main focus was on a speech by Chinese Premier Li Keqiang, which painted a rather downbeat assessment of the Chinese economy for 2019. The downgrading of the GDP estimate for 2019 to between 6% and 6.5% shouldn’t really have been too much of a surprise given the slow start to the year, however the wider tone was also more downbeat than expected. While the VAT cuts announced yesterday were generally well received, Premier Li’s tone had the effect of anchoring expectations towards the lower end of the scale, as he warned against expecting large-scale stimulus measures.

As a company that does a lot of business in the US, Ashtead Group, the UK company that rents construction and industrial equipment, has seen a strong rebound in its share price since the one-year lows hit at the end of last year. Much of this can be attributed to the strong rebound in US markets, in the wake of the softening of tone from the US Federal Reserve at the beginning of January. Its US business contributes to the lion’s share of its overall revenue, with the company posting a strong first-half of the year on the back of a strong performance in the US economy.

This morning’s Q3 update was more or less in line with expectations, with full-year results expected to be in line with previous guidance as revenue for Q3 came in at £1.14bn, with a profit of £254.3m. Revenue and profit are up by 18% year to date. Management did go on to say that full-year capital expenditure would be towards the upper end of expectations, and that appears to have translated into some short-term profit-taking after recent advances. With the US economy likely to slow further in Q4, and as the share price also running into resistance at its long-term 200-day moving average, the share could slip further.

In terms of the UK insurance market, this morning’s full-year numbers from Direct Line were a mixed bag, with operating profit down 8.1%, and overall premiums declining from £3.39bn to £3.21bn, though this decline has been attributed to the company’s exit from its partnerships with Sainsbury’s and Nationwide. The company also announced a special dividend of 8.3p as well as a final dividend of 14p a share.

GVC Holdings, the owners of Ladbrokes and Coral, also announced annual unaudited proforma numbers in line with expectations. Having completed the integration of the Ladbrokes Coral acquisition and joint venture in the US with MGM Resorts a year ago, comparatives are always difficult, but by presenting the results as if the joint business had been operating in 2017, prior to integration, it can give a better idea of the direction of travel. On that basis the numbers looked solid, with overall revenue up 9%, and gross profit up by 7%.

UK retail was challenging, with revenue down by 3% as the company gears up for the changes to its betting terminal business with the new maximum stake legislation, which is set to result in a significant number of shop closures. On the plus side the repeal in the US of the Professional and Amateur Sports Protection Act opened the potential for the huge US online sports betting market, in partnership with MGM Resorts. This recent development could offer the potential for future revenue opportunities in further US states over the next three to five years, more than offsetting any negative impact by increased regulation in UK markets.

On the subject of UK retail Debenhams woes continued after the company issued another profits warning on its trading activity year to date with UK sales declining 6.2%

US markets slipped back yesterday, with the S&P 500 failing to sustain a move above the 2,800 level, as investors embarked on some profit-taking.

Salesforce shares are likely to be in focus after reporting their latest numbers after the closing bell. The shares had already been in decline leading up to the numbers after the bell, and the weak guidance issued for Q1 saw further losses in post-market trading. While the Q4 numbers were much better than expected, it was the modest downward revision to Q1 revenue that appear to have sparked further selling. Having seen the shares push up to all-time highs in recent weeks, it’s probably not too much of a surprise to see some weakness here. 

US retailer Target is also expected to come under scrutiny in the wake of recent decent numbers from Walmart and Amazon. Its Q4 figures are expected to show sales of $22.9bn and profits of $1.53c a share. The retailer had a disappointing Q3, but its sales numbers for Thanksgiving and the Christmas period were pretty solid, despite the shock of the recent US retail sales for December, which saw a decline of 1%. Investors are likely to be more interested in the company’s guidance in the wake of the US government shutdown, which may well have hit consumer spending patterns in the first part of this year. Any disappointment on guidance could see the stock come under pressure.

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