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Market Outlook

The week ahead: Fed minutes, RBA rates; ASOS, Saga results

Read our pick of the top stories to look out for this week (5-9 April), and view our key company earnings schedule.

In this week's video, Michael looks back at a decent quarter for equity markets in general, and the outlook for currencies, commodities, interest rates and equity markets. Key events this week include FOMC minutes, services PMIs and the latest numbers from ASOS, Saga and Dunelm.

Carnival Q1 results

Tuesday: Carnival’s cruise business has been decimated as a result of the pandemic, as revenues disappeared overnight. In its last fiscal year, total revenue fell from $20.8bn to $5.6bn, with few hopes of improvement. Last month, the US Centers for Disease Control and Prevention dealt a blow to the cruise industry by saying there was little prospect of lifting the no-cruise order before the end of November this year. Carnival's share price had almost doubled since their October 2020 lows, but this news pulled the shares back down from their highest levels in a year.

Despite these setbacks there are pockets of hope, with the company offering localised cruises to vaccinated customers in specific areas. In March, Cunard announced it would be offering 'Summer at Sea' luxury voyages around the UK on board the Queen Elizabeth. These cruises will take the form of round trips out of Southampton, lasting between three and 12 nights, and will include the Jurassic Coast, Cornwall and Land’s End, as well as the Scottish islands. They will only be available to vaccinated UK residents. Its other brands are also offering UK 'Summer Seacations', which could help with the company cashflow in the short term. However in the absence of a more general resumption to normal service, the cruise industry is likely to remain on life support for quite a while longer yet.

Reserve Bank of Australia rate decision

Tuesday: The RBA kept rates unchanged at 0.1% in it last meeting, against a backdrop of concern about rising property prices, after February 2021 recorded the biggest rise in house prices for 17 years. This isn’t a unique problem for Australia, given that the likes of the US and UK have a similar problem, with RBA governor, Philip Lowe, more concerned about the recovery from the Covid-19 pandemic as well as the unemployment rate, which has fallen back to 5.8%, after peaking at 7.5% in the middle of last year.

FOMC minutes (March)

Wednesday: At its most recent meeting, the US Federal Reserve faced a tricky balancing act when it came to managing the message over its optimism around a US economic recovery, while at the same time not giving markets the impression that they might look to rein back on their monetary policy stimulus too soon. There was a concern that markets might take the wrong message from some Fed officials moving their dot plot estimates for a possible rate rise from 2024 into 2023, after upgraded economic forecasts due to the newly signed-off fiscal stimulus and an accelerated vaccination programme This remains a real risk, and while US 10-year yields are higher now than they were at the time of the last meeting, Fed officials do seem to be comfortable with this at the moment.

Chair Jerome Powell was clear that the Fed was happy to tolerate an overshoot before taking any action pre-emptively, and this appears to have soothed concerns in this regard for now, however the real risk is likely to come from the shorter end of the curve. For now, two-year yields are well anchored down near 0.15%, and while that remains the case, we can probably see higher longer-term yields in the short term. The nature of any discussions by various FOMC members will be closely parsed to see where, if any, splits on the timing of a taper or rate rise are likely to come from, with particular attention likely to be on next year’s voting members. Atlanta Fed president Raphael Bostic has already suggested that the Fed could start to look at rate rises in 2023 if the data supports it, and while that is a minority view, it's unlikely to remain so if the US labour market continues to improve.      

Global services PMIs (March)

Wednesday: China and the US aside, whose services sectors have held up well, the sector continues to bear the brunt of the global pandemic. Even where we are seeing outperformance, the jobs recovery in these sectors has struggled to match up to the headline numbers. The slow rollout of the vaccine programme in France and Germany is hampering economic activity, with last month’s flash purchasing manager indices (PMIs) pointing to a February slowdown from January’s levels, as France slipped to 43.6, while Germany fell back to 45.9, well into contraction territory.

Economic activity in the UK showed a sharp rebound to 49.7, from 39.5 in January. While the UK government is outlining a roadmap out of lockdown, albeit on a very slow basis, there is little talk of that so far in Europe. If these numbers are confirmed, it will also reaffirm the continued divergence between the services sector and manufacturing, which continues to show fairly decent economic outperformance, despite restrictions. The latest Spain and Italy services numbers are also expected to remain subdued, with services activity to remain sub-50. With France and Germany still in various states of tightened restrictions, it's hard to make the case for any type of decent recovery soon, which means February is likely to see the sixth conservative month of contraction.

Despite the positive vaccine news lifting the mood from a markets point of view, the various delays in the rollout makes it clear that there will be no significant uptick in economic activity until restrictions are eased, perhaps sometime in late spring.

Saga full-year results

Wednesday: When Saga was first floated on the stock market back in 2014, hopes were high that the pursuit of the so-called ‘grey pound’ would reap enormous benefits in the years ahead. As a travel and insurance business, the company appeared to be well diversified with annual revenues of £1.25bn and profits of just over £109m. Since then, Saga's share price has tanked as the company has lurched from one crisis to another, while the pandemic taking a toll. Saga's share price finally appeared to bottom out in October last year.

In January, the firm said it expected to generate a pre-tax profit largely on the back of an improvement in its insurance business, with policy sales up 1% year-on-year. Saga’s biggest problem remains around its cruise and travel business, which is seeing fairly limited activity. Fortunately, given that the UK is its home market, the outlook is promising for some kind of prospect of a summer season, however the slow vaccination response in Europe may limit the upside in terms of a return to normal this year.  

UK services PMI (March)

Wednesday: As the UK economy heads towards reopening this month, we’ve already seen evidence that businesses are gearing up for this economic reopening. The flash PMI numbers at the end of last month saw services activity surge to 56.8 from 49.5 in February, and a low of 39.5 at the beginning of the year. This rebound in activity suggests that businesses are building up inventory as well as making preparations for a coiled spring rebound in Q2. With vaccinations continuing apace and the weather getting warmer, hopes are high for an even stronger Q2. Non-essential retail reopens on 12 April, with pubs also reopening for outdoor business as we get ready for a long-anticipated beer, as well as a haircut, though not necessarily in that order.

ASOS half-year results

Thursday: In January, ASOS reported a 24% rise in total retail sales for the four-month period to date, with the UK market driving those gains at £554.1m, a rise of 36% from the same period a year ago. The company was bullish on the outlook, despite higher costs as a result of Brexit, to the tune of £15m. The company retained a cautious outlook for the first half despite a 90bps decline in gross margin. Since then, management have been busy picking through the ruins of a devastated retail landscape. In February, the company confirmed it had acquired the brands of Topshop, Topman, Miss Selfridge and HIIT brands for £265m, fully funded from cash reserves. Further costs included the acquisition of £30m of stock to support initial trading, as the brands get migrated into ASOS' product cycle. There was also a £20m one-off integration cost, which could be added to January’s guidance upgrade. That was increased to £190m, as the company said it was accelerating its US strategy vai its partnership with Nordstrom.

Constellation Brands Q4 results

Thursday: The closure of bars, pubs and restaurants will have hit sales across all of Constellation’s brands, even accounting for increased sales from supermarkets, off-licences and liquor stores. The company is also behind Corona beer, which initially saw sales fall over its name association with the virus, but has since recovered. In Q3, the company reported decent growth in its beer portfolio at 12%, up from 5% in Q2. This is expected to slow a little in Q4, with the company also hoping to start reaping dividends from its stake in Canadian cannabis company, Canopy Growth. In January, CEO Bill Newlands expressed confidence that the company would achieve 7% to 9% in net sales growth for the current fiscal year, with an 8% to 10% increase in operating income growth. Current consensus estimates are for a Q4 profit of $1.53 a share.

Dunelm Q3 results

Thursday: Dunelm has managed to ride out the Covid-19 pandemic fairly well, despite the various store closures it had to contend with. In its last full-year numbers, the company's Q4 numbers were hit hard by the first lockdown, as total sales fell by 28.6%. The performance of its online sales helped to compensate to some extent, with a rise of 105.6% on the year. This helped stem the decline in full-year sales to a mere 3.9%, which given the store closures was a fairly decent result.

In February, the company reported in its first-half numbers, a 23% rise in total sales to £719.4m, driven by a 111% rise in digital sales, despite stores being closed for most of Q2. Profit-before-tax saw an increase of 34.4% to £ 112.4m, with management taking the decision to pay an interim dividend of 12p per share. This figure included the repayment of its govenment furlough money, reinforcing the success the business has had in being able to adapt to the challenges. As we look to this week’s Q3 numbers, it's quite likely that we could see a similar pattern, as the result of the same store closures in Q2. On the plus side, Dunelm will also be gearing up for the reopening of its store real estate next week, and a potentially stellar final quarter as we come to the end of what has been a difficult fiscal year for the retail sector.

Levi Strauss Q1 results

Thursday: When Levi Strauss reported its Q4 numbers back in January, it was a familiar picture of decent digital sales while store traffic struggled as people stayed at home. Global digital sales rose 15% from the year before, while total holiday sales fell 12%. This shouldn’t have been too much of a surprise given the slowdown in US retail sales in the final quarter of 2020, however it does offer hope of a strong rebound in Q1, as these various stimulus payments trickle down into higher consumer spending in January.

Levi’s European operations are still expected to be a drag, with around 50% of its stores in Europe closed. In Q4 the company made a profit of $0.2 a share on revenue of $1.39bn, and this latest quarter is expected to see an even better return, as US consumer confidence returns, with expectations of $0.24 a share.       

Index dividend schedule

Dividend payments from an index's constituent shares can affect your trading account. See this week's index dividend schedule.

Selected company announcements

Monday 5 April Results
Carnival (US) Q1
Duck Creek Technologies (US) Q2
Tuesday 6 April Results
Lindsay (US) Q2
Paychex (US) Q3
Wednesday 7 April Results
AA (UK) Full-year
Curtis Banks (UK) Full-year
Hilton Food (UK) Full-year
Lamb Weston (US) Q3
Landec (US) Q3
Pharos Energy (UK) Full-year
RPM International (US) Q3
Saga (UK) Full-year
Simply Good Foods (US) Q2
Thursday 8 April Results
ASOS (UK) Half-year
Constellation Brands (US) Q4
Dunelm Group (UK) Q3
PriceSmart (US) Q2
Stolt-Nielsen (UK) Q1
WD-40 (US) Q2
Friday 9 April Results
Silvair (US) Full-year

Company announcements are subject to change. All the events listed above were correct at the time of writing.


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