It’s been a weak start to trading in Europe in the wake of yesterday’s strong tech inspired rebound in which saw US tech stocks drive the S&P500 back to within touching distance of 3,400.

Despite a positive Asia session these gains have given way to some profit taking today ahead of today’s European Central Bank rate decision.

So far this year EU Inflation has fallen from 1.4% in January to annualised levels of 0.4%, at the most recent level, at the end of August, with core prices similarly subdued, falling to a record low of 0.4%. This is likely to be a concern for the European Central Bank at a time when nearly all central banks are struggling to meet their inflation targets.

It was only in June the ECB expanded the size of its Pandemic Emergency Asset Purchase program from €750bn to €1.35trn as well as extending it into the middle of next year, in an attempt to mitigate the effects of coronavirus economic shock on the wider European economy. While we’ve seen some evidence of an economic bounce back from the lockdowns seen in March and April, there are rising concerns that the recovery is now faltering, while the recent move in the euro to 1.2000 has also given rise to fears that this in itself will also be deflationary.

The recent intervention by ECB Chief Economist Philip Lane in talking the euro lower gives an indication that the Governing Council is concerned about the effect a stronger currency might have on the overall recovery story in Europe.

With the Federal Reserve only recently outlining its intention to relax its inflation mandate to allow for an inflation overshoot, today’s meeting will be noteworthy in terms of whether the ECB attempts to steer a similar course.

ECB President Christine Lagarde faces an enormous challenge in articulating the central banks intentions in this regard, particularly since her performances at previous press conferences have tended to be more waffle than substance. Her lack of experience as a central banker has already manifested itself in previous press conferences when she said the central bank is not here to close the spreads.

Today’s press conference will be similarly challenging when she addresses how the ECB will look to tailor its monetary policy response to the currently changing conditions. It would be enormously helpful in terms of defining the central banks intentions if markets were able to deal with someone like Philip Lane to address these types of issues rather than have to deal with two ex-politicians who are used to talking a lot, but saying very little.

In truth it is going to be very difficult to address the issue of current euro strength simply because for the most part it has been a symptom of recent US dollar weakness.

In the quarter to date it is only the fifth best performing currency against the greenback behind the Scandinavian currencies and the Australian dollar. If the ECB want a weaker euro it is more likely that the Federal Reserve, or President Trump can deliver that, rather than Messrs Lagarde and co.

No changes in policy are expected, though we can expect plenty of we remain ready to do whatever it takes to support the recovery along with heavy hints about expanding their PEPP program.

IAG is one of the better performer’s today after it announced that its recent capital raising had seen it generate €2.74bn, as a result of the issuance of new shares.

The food retail sector has been one of the few sectors to emerge from the current crisis relatively unscathed, supporting the UK consumer through what has been a very challenging time for the UK economy.

Today’s interim numbers for the first half of this year for WM Morrison appear to reflect that outperformance with like for like sales ex fuel rise 8.7%, helping to push revenues up to £7.55bn, from £6.93bn last year.

The rise in revenues hasn’t come without challenges, particularly when it comes to safeguarding its staff, which has seen its costs soar by £155m, though the business rates relief of £93m has helped to offset some of that. As a result profits declined to £148m from £198m, a fall of over 25%. On the plus side the company raised its interim dividend by over 5% to 2.04p, though any decision on the final special dividend has remained deferred.

As a result of the higher costs presented by the current pandemic the company said they would not be reporting against their £75m to £125m profit target, and this appears to have prompted this morning’s weakness in the share price.

Another retailer that had been doing quite well until Covid-19 hit was Dunelm Group and whose share price has recovered all of its losses from the March lows of 592p, to make new record highs of 1,562p earlier this month.

Today’s full year numbers for the period ended 27th June 2020 have been a remarkable testament to the company’s resilience, and despite the lockdown total sales only saw a modest decline of 3.9% year on year to £1,058bn, with profits before tax falling 13.3% to £109.1m. The larger decline in profits, while partly as a result of the store closures, was also due to the additional costs involved in safeguarding staff and customers.

This is a remarkable result given the challenges facing the retail sector, with the company clearly benefitting from UK consumers looking to implement improvements to their homes with the only question being whether this resilience is already factored into the share price recovery. This morning’s rather modest share price reaction would suggest that this is the case.

The company said it had not made any claims under the job retention scheme, and would not be claiming the “JRS Bonus”

On-line sales were a big winner rising 105.6% in Q4, while the company performance in the first two months of FY21 has seen sales growth of 59% in July and 24% in August. Given this robust performance and contingent on their being no further material impact from Covid-19, the board has said it expected to reinstate its dividend. 

Another big winner from Covid-19 has been Games Workshop which has seen its share hit record highs this morning after reporting that it expected quarterly sales to come in at £90m, well ahead of expectations of £78m. Gaming has been an area which has done very well in recent months, not only during lockdown, but post lockdown as well. Profits are expected to rise from £28m in 2019 to £45m with the company saying it intends to pay a dividend of 50p a share.

The pound is also in focus today as EU and UK officials sit down to discuss recent UK plans to make changes to certain sections of the Brexit withdrawal agreement with respect to the Northern Ireland protocols, which has prompted accusations of bad faith, and breaches of international law.

In turn this has raised concerns that the talks might break down completely and for there to be no deal at all. We have seen a modest recovery in sterling in the past 24 hours in the hope that calmer heads will prevail, and that this may well be a negotiating ploy, however it does raise the question as to what else is going on behind the scenes to prompt such grandstanding.  

US markets look set to fall back a touch after yesterday’s solid rebound with the main focus on whether the big fall in last week’s weekly jobless claims numbers to 881k can be sustained, with continuing claims also expected to fall further to 12.9m, from 13.25m.  

We’ll also be getting the latest numbers from Peloton, whose shares have seen some decent gains in the past three months, as a result of thousands of new subscribers as a result of the global lockdowns. Last year the company IPO’d at $29 a share, valuing the business at $8.1bn, on the premise that punters would pay over $2,000 a pop, for a branded indoor exercise bike and then $40 a month subscription fee by which the company streams exercise classes to the user.

At the time, selling this as a sustainable business premise might well have been a tall order, however times have changed quite a bit since then. An economic lockdown which closed gyms and real-world classes, appears to have prompted a surge of interest with over 20,000 attending one of its streaming classes in April. Since then the shares have surged to $90, despite the company posting a loss in Q3. The big question now with gyms starting to reopen is whether the revenue stream can be sustained, and the rise in subscriptions can be sustained.


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