Sentiment in stocks has been shaken as President Trump has threatened China with tariffs.
The US leader blames China for the pandemic, and he is clearly not happy about the fact that over 30 million people in the US have lost their jobs since the health crisis struck. Many European equity markets are closed today as it is May Day, but the FTSE 100 has come under pressure. During the week the British index reached its highest level since early March, so the rising trade tensions acted as a good excuse to dump stocks. There has been a decent recovery in European stocks since mid/late March, but now traders are worried we could be in for another round of the US-China trade spat.
RBS shares have bucked the wider negative trend as the bank posted better than expected first quarter numbers. Operating profit before tax slumped by 49% to £519 million, but equity analysts were expecting £415 million. Loan impairments of £802 million weighed on earnings, and keep in mind the impairments for the same period last year were only £86 million. Banks around the world are getting ready for a jump in bad debts. The bank had a good performance in the three month period as total income ticked up by 4.1% to £3.16 billion, while the cost to income ratio dipped to 57.7% from 63.4%. The bank will continue to scale back its risk-weighted assets at NatWest Markets and it aims to achieve lower income disposal losses than the £400 million originally predicted. The lower interest rate environment caused the net interest margin to slip to 1.89% from 1.93%. Lending margins are likely to be squeezed further given the various interest rate cuts seen in recent months.
Ryanair are now more downbeat in their outlook, hence why the stock is lower today. The airline is hoping to restart flights in July, but it was originally aiming for June. In addition to that, it is now seeking to delay delivery of aircrafts from Boeing, while it previously said it had no intention of delivery delays. A loss of €100 million is expected for the three months until the end of June. Between July and the end of September, the airline is aiming to be operating at 50% capacity. Ryanair announced the headcount will be lowered by 3,000. One could argue that Ryanair was too optimistic with the original guidance, so now the group might have tempered expectations.
Wizz Air restarted a limited number of flights from Luton Airport today, so the rest of the sector will be paying close attention to their developments.
Greggs have decided against reopening 20 stores, as the group felt it would be better to conduct trials behind closed doors. The original plan was to reopen a limited number of stores to see if the business could operate under social distancing guidelines, but management have decided to conduct the tests internally. The news has pushed the share price lower, but just because they are not reopening a small number of stores now, it doesn’t necessarily mean that all stores will remain closed indefinitely.
Barratt Developments have become the latest house builder to map out a return to work plan. From 11 May the group will start preparing sites for the new working conditions – following social distancing guidelines – and then the company will pursue a phased recommencement of construction work. Barratt is aiming to reopen roughly 50% of its sites, and it will focus on projects that are near completion. It is encouraging to see the company is planning on getting back to business. The house builder has a strong liquidity position as its cash position is £430 million, and it has access to a £900 million credit facility. It is eligible to tap into the Covid Corporate Finance Facility.
Royal Dutch Shell shares are in the red again as the company cut its dividend yesterday – it was the first time the dividend was reduced since the 1940’s. It would appear that lots of funds that seek high yielding stocks are existing their positions in the oil titan.
Stocks are in the red thanks to Trump’s comments in relation to potentially imposing tariffs on imports from China. Some people would argue that Mr Trump waited until there was a sizeable rebound in US indices before making his remarks about tariffs. The flare up in trade tensions has frightened traders a little, hence why stocks are in the red. It is possible the US president is just throwing his toys out of the pram for now, because a full-blown trade war is the last thing both China and the US need right now. The S&P 500 is down 1.8%, but keep in mind it rallied 10.7% in April. The ISM manufacturing report for April was 41.5, exceeding the 36.9 forecast, but it was still a sharp fall from the 49.1 posted in March.
Last night Amazon posted their first quarter numbers, and traders were a little worried the company is planning on spending $4 billion on Covid-19 related costs. The online retailer has seen a jump in demand due to the lockdowns, but it wants to ensure that is can operate safely, hence the massive spending plans. Funds will be spent on virus-testing, higher wages, personal protection equipment and cleaning. Covid-19 is a double edged sword for Amazon. The results were mixed as EPS were $5.01, but equity analysts were expecting $6.25. Revenue was $75.46 billion, beating the $73.61 billion consensus estimate. When you factor in the $4 billion spending plans, the second quarter operating profit could be between -$1.5 billion and +$1.5 billion. Last year’s second quarter profit was $3.1 billion.
Apple didn’t offer a guidance in last night’s update on account of the economic uncertainty. Tim Cook, the CEO, said the company experienced a steep fall in business in February, but things began to recover in March, and there was a further recovery in April – this echoed Alphabet’s update during the week. EPS were $2.55, exceeding the $2.26 forecast, and revenue rose fractionally to $58.3 billion, topping the $54.54 forecast that analysts were expecting. Revenue from iPhone sales fell by 7% to $28.96 billion. The groups’ Wearables, Home & Accessories unit performed well, so did Services - which saw a 16% in revenue to $13.34 billion. Like Netflix, Apple TV+ saw a jump in demand due to the lockdowns, but there is the risk that viewership might taper off once the lockdowns are eased. The stock is now up on the day.
The CMC EUR index is up over 0.6% on the session. The single currency has been pushing higher for the past 24 hours - largely driven by a fall in the US dollar. Yesterday, the Fed widened the scope of the Main Street lending scheme and that hurt the greenback, and in turn the euro rallied.
The ‘commodity currencies’, the Australian dollar and the Canadian dollar, are in the red as traders are in risk-off mode. Metals are down on the day, while oil has been handing back earlier gains.
The CMC GBP index is in the red as the UK remains in lockdown, but there is some optimism the UK government will announce a plan to ease up on restrictions next week. The BoE consumer credit report was -£3.8 billion in March as appetite for credit dried up amid the lockdown.
Gold is in the red again as the metal remains under pressure. The commodity had a great run in April, as traders were very fearful of the health crisis, but since there has been a loosening of lockdown restrictions, gold has been under a bit of pressure. It is possible that dealers are unwinding their long gold positions now that more countries are edging towards easing their restrictions. The metal is offside today even though traders are in risk-off mode – which highlights the sour sentiment in gold.
The oil market has been drifting lower throughout the day as the US-China trade story has chipped away at sentiment. The energy was higher earlier in the session, but those gains have faded - Brent crude is now is the red, while WTI is clinging onto small gains. The energy enjoyed a positive run on Wednesday and Thursday as US stockpiles weren’t as high as traders expected, but now the tariff story has taken centre stage.