Stocks are sharply lower as risk-off sentiment is doing the rounds.
Yesterday there was little movement in European indices as the Fed update was in focus. The US central bank kept rates at their record lows and it pledged to do what is needed to support the economy. Dealers were expecting dovish commentary from Jerome Powell, the Fed’s boss, but now that the meeting is out of the way, the focus has shifted back to the pandemic, and the political infighting in the US. A jump in coronavirus cases in parts of Spain, Australia, Brazil and China, has added weight to the argument there will be a second wave. In the US, Republicans and Democrats have yet to reach an agreement in relation to the $1 trillion stimulus package, and that is also playing into the bearish mood.
Lloyds shares fell to an eight year low today as the bank posted a larger-than-expected second quarter bad debt provision. The finance house, like its peers, predicts that bad debts will jump on account of the pandemic. For the three month period, the bank set aside £2.4 billion for credit losses, but the consensus estimate was £1.5 billion. The bad debt provision for the first six months was £3.8 billion and that led to a pre-tax loss of £602 million, hence the tumble in the share price. During the PPI fiasco, Lloyds would periodically set aside more and more funds to cope with the situation, and it feels like there will be a repeat of that in relation to credit losses. The net interest income is the money the bank earns from lending, and it dropped by 11% to £5.4 billion. The low interest rate environment is likely to keep the pressure on lending margins.
Standard Chartered shares have also been hit by credit impairments. In the first half, the bank’s bad debt provision was $1.57 billion, which was a huge increase on the $254 million posted last year. Profit before tax for the six months dropped to $1.63 billion, which was a 32% fall on the year. The bank issued a downbeat outlook too as it warned that income in the second half is likely to be lower, both on a quarterly and yearly basis. On a slightly more optimistic note, it predicts the loan impairments in the second half will be below that of the first half.
NatWest Group will post its first half numbers tomorrow, and dealers are mindful that Lloyds and Barclays announced larger-than-anticipated provisions for bad debts.
BAE Systems announced that it is reinstating its dividend, and that has helped the stock buck the wider negative trend. The defence group will pay a dividend relating to last year, and it will pay a dividend for the first half of this year too, so it is a double pay-out for shareholders. These days any company that resumes paying a dividend stands out from the crowd. The share is more attractive as some investors are driven by a desire to earn an income in the form of a dividend. The payment of a dividend also projects an optimist outlook as it is confident in its future earnings ability.
Traders initially had a muted reaction to the update from Royal Dutch Shell, whereby the second quarter loss attributed to shareholders was $18.1 billion, but the stock came under pressure as the oil market drifted lower. The enormous loss was mostly down to the $22.3 billion pre-tax impairment – the company revised its medium and long term assumptions for energy prices. Last month it was revealed that it would incur charges of between $15 billion and $22 billion, so today’s news didn’t shock dealers. Stripping out one-off costs, the oil titan saw earnings slump by over 80% to $638 million. Weaker oil, LNG and gas prices were cited for the poor earnings reading.
Equities are in the red as sentiment across the board is weak. The pledge from the Fed yesterday that it will do what is needed to support the economy hasn’t been enough to maintain the upbeat mood of last night. The US economy contracted by 32.9% in the second quarter. The colossal fall in output wasn’t as severer as economists had expected, as the forecast was -34.1%. The economy shrank by 5% in the first quarter Given that states started to reopen their economies in recent months, the economy should rebound from here. For the second week in a row, the jobless claims figure ticked up. The reading rose from 1.42 million to 1.43 million. The continued claims update was 17.01 million, and that was an increase from the previous reading of 16.15 million. The pausing of the reopening of states is most likely behind the stalling of the labour market.
Qualcomm shares have jumped today on the back of the well-received third quarter numbers last night. EPS was 86 cents, which topped the 71 cents forecast. Revenue was $4.89 billion, and equity analysts were expecting $4.81 billion. The company finalised a long running dispute with Huawei. The Chinese company will pay the group roughly $1.8 billion for using its patented technology. Qualcomm will benefit from the growth of 5G technology – which is tipped to expand greatly in the years ahead.
UPS saw a surge in demand for delivery services on account of the lockdowns. The latest quarterly update showed that domestic residential delivery services jumped by over 60%. Revenue rose by 13.4% to $20.46 billion, topping the $17.48 billion forecast. EPS was $2.13, and that smashed the $1.07 consensus estimate.
Alphabet, Facebook, Amazon and Apple will post their latest quarterly updates after the closing of trading tonight.
The US dollar index has given back some of its earlier gains but it is still up on the session. The US index fell to a new two year low yesterday, but not long after the Fed issued its dovish update – which traders were expecting – some bargain hunters stepped into the fold. In recent months, the greenback has attracted safe haven funds, which is also a factor in today’s positive move.
EUR/USD is in the red on account of the firmer US dollar. The dreadful growth figures from Germany added to the euro’s woes too. In the second quarter, the German economy shrank by 10.1%, undershooting the 9% fall that economists were expecting.
GBP/USD is trading above the 1.3000 mark – the first time since 10 March. The relatively robust greenback couldn’t stop the push higher of the pound.
Brent crude and WTI are in the red as the wider bearish sentiment has hit the oil market. The jump in the number of coronavirus cases in places like Brazil and China has impacted oil, as traders are worried that demand will tumble. The chatter of a second wave is hanging over the oil market.
Gold is in the red as the move higher in the US dollar has hurt the metal, the inverse relationship between the two markets continues to be strong. The recent bearish streak in the US dollar was a big factor in gold hitting an all-time high this week, so now some traders are booking their profits in light of the mild rebound in the greenback. Given gold’s very aggressive upward move in the past few weeks, it is not a surprise that it is now incurring a sizeable pullback.