Stocks in Europe appear to have run out of steam after the gains of the last seven weeks, with profit taking appearing to be the order of the day, with losses in excess of 1% across the board. While today’s losses are quite large, they don’t appear to be being driven by concerns over the economic outlook. If they were copper prices wouldn’t be firmer and the US dollar wouldn’t be weaker.
With the ECB due to announce its latest policy decision on Thursday and a host of companies reporting their latest numbers, it would appear that after the impressive gains in the past few weeks some are taking the opportunity to book some profits, hence we might see further weakness in the shorter term. The FTSE 100 has slipped back below the 7,000 level, hitting a low below 6,900, with tobacco stocks, retailers and airlines bearing the brunt of the losses.
The decline in tobacco stocks has spilled over from last night’s US session, which was prompted by reports that the US is considering legislation to cut the amount of nicotine in cigarettes to a level that’s not addictive. Putting to one side what level of nicotine isn’t considered addictive this could have the unintended consequence of making people smoke more, not less in order to get their fix. While no one is arguing that nicotine isn’t addictive and new legislation is unlikely to resolve the reasons why people feel compelled to smoke in the first place. In any case we’ve seen some big falls today in the likes of British American Tobacco and Imperial Brands with some speculation that the US FDA might be considering a ban on menthol cigarettes, a move that would disproportionately impact British American Tobacco.
On the retail front, Associated British Foods is lower after reporting big losses in its Primark business. This seems somewhat of an overreaction given that this isn’t a surprise and while the stores have been closed for a good part of the last 12 months, its other businesses have performed better than expected. In the first half of this year revenues in its other businesses of Grocery, Sugar, Ingredients and Agriculture were all higher than last year, with groceries up 9%, sugar up 1%, ingredients up 2% and agriculture up 8%, while profits in all four were also higher. This has helped soften the blow of a 41% decline in retail revenues and a 90% decline in profits, as a result of Primark stores being closed and no online operation.
For the business as a whole, group revenue declined 18% to £6.3bn, while profit-before-tax halved to £319m. With all stores now reopened, management expressed optimism that some of this lost revenue can be caught up, with record sales reported since the 12 April reopening. In a sign of confidence about the future, management said they would be returning the £121m of the government's job retention scheme money, while also proposing an interim dividend of 6.2p per share, at a cost of £49m. All in all, while the shares are sharply lower, there isn’t anything particularly concerning about these numbers, which makes the ABF share price reaction that much more puzzling.
Airline stocks are also getting a bit of a pounding after the UK put India on the red list for flights, while there is also rising concern about increasing cases across Asia, with Japan a particular concern. With the French government also increasing its stake in Air France-KLM, and the airline raising another €1bn, it would appear that this has also spooked the markets, in a sign that any recovery in this sector is likely to take a lot longer than had originally been anticipated. British Airways owner IAG's share price is also lower,along with the likes of easyJet and Ryanair.
On the plus side, Avast shares are higher after the company, which is also the company behind the AVG security and antivirus software, raised its guidance for 2021, after seeing a 10.5% rise in Q1 revenues, saying it expects to see revenue growth for 2021 to come in at the upper end of its 6% to 8% guidance.
The European Super League proposals continue to dominate the news cycle with reports that two or three Premier League clubs are wobbling on the proposals in the face of the severe backlash that has unfolded since the news broke. Both Juventus and Manchester United shares have both come under pressure after the gains of yesterday, as it becomes apparent that even within the various Premier League clubs, support among the players appears lukewarm at best.
US markets opened sharply lower taking their lead from the weakness in European equity markets, as equity markets take a pause, from the record highs that we’ve seen on a fairly regular basis over the past few weeks.
Producers of Marlboro cigarettes, Altria Group shares have continued where they left off yesterday, losing further ground after yesterday’s 6% decline, which was driven by reports that the US was considering legislation to cut the amount of nicotine in cigarettes to a level that’s not addictive.
United Airlines shares are lower after the company reported bigger than expected losses for its most recent quarter, as losses came in at $1.4bn, on revenues of $3.22bn. One of the reasons cited was higher fuel costs, while demand still remains well down on normal levels. In terms of its guidance, the company said it expects capacity in Q2 to improve to 45% of 2019 levels as more people travel in the summer months.
Johnson & Johnson latest numbers have seen the pharmaceutical giant beat expectations for quarterly revenues and profits. The company also reported $100m in sales for its single shot Janssen Covid-19 vaccine, which has currently been paused by US regulators, due to concerns over blood clots, while EU regulators have said that while there might be a possible link, the shot benefit risk remains positive.
On the plus side and despite the weakness in tech shares, IBM's latest Q1 results were quite well received, after reporting its best revenue growth numbers in almost three years. Revenues came in at $17.73bn, with growth across all of its businesses, helping to push profits up to $1.77 a share, with expectations of better numbers in Q2.
The pound hit its highest levels since early March against the US dollar earlier today, as UK ILO unemployment slipped back to 4.9% in February. It is quite clear that the government furlough scheme is continuing to disguise the underlying effects of the pandemic, with almost 5 million people still on the scheme, which means the very real effects on the UK labour market won’t start to be seen until Q3 at the earliest, as the furlough scheme starts to wind down. For now, demand in the economy looks good, however the big question is whether it's sustainable, and that is something that is a little harder to predict.
The US dollar has been a bit of a mixed bag, with the Australian dollar outperforming largely on the back of firmer metals prices, with copper prices back close to record highs. This suggests that for all the weakness in stock markets, the broader macro story still looks positive, with resilient raw material prices suggesting decent demand.
The resilience in copper prices can in some respects be put down to today’s US dollar weakness, however it is also clear that demand appears to be holding up well, with the price edging back towards the record highs we saw in February.
Oil prices are also looking fairly resilient, despite the recent sell off in equity markets, with some supply disruption concerns from Libya helping to underpin prices, with Brent at one-month highs.
Gold prices are looking slightly softer after hitting a seven-week high yesterday.