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European stocks rebound, despite new lockdown concerns

CMC Markets

Markets in Asia have seen a largely positive session despite the prospect of further restrictions across the whole of Europe in the lead-up to Christmas.

A better than expected China manufacturing PMI number for October of 53.6, its best level in nearly 10 years, points to the fact that the world’s second biggest economy has continued to gain traction as it slowly returns to some kind of normal after its February lockdown. The positive session has seen markets in Europe recover from an early negative start, to push into positive territory, helped by better than expected manufacturing PMIs which are helping to offset concerns over the prospect of, at best, a flat-lining economy as we head into year end.

Even without the weekend news of another UK-wide tightening of restrictions, the outlook for the travel sector was already looking increasingly bleak, even without the prospect of a ban on international flights over the course of the next month or so. While politicians have held out the hope of a relaxation of restrictions at the beginning of December, the reality is that we could well go beyond that, and it would appear the softening up for just such an outcome is already beginning.

In simple terms it would be foolhardy in the extreme for the government to unlock, or relax some of these new restrictions when Christmas would still be three weeks away, and run the risk of another spike in hospitalisations which would threaten the festive period itself. It would seem much more likely, and sensible, if there is a desire to preserve some kind of Christmas festivities, that these restrictions will extend into the middle of December, where a limited relaxation could occur to allow a weary and increasingly restive population the time to see family and friends over the Christmas and new year period.      

Ryanair this morning gave another insight into the pressure airlines are under by saying that they expect to record higher losses in the second half of the year than they did in the first half. In the first half of the year the airline lost €197m which on the face of it seems an extremely low amount when compared to its peers. This was achieved by a reduction in operating costs of 67%, which came down from €4.1bn to €1.35bn. Revenues slumped by 78% to €1.18bn, with most of that earned in the second quarter. Passenger numbers fell from 85.7m to 17.1m, with the shares only under modest pressure in early trade. The biggest losses are being seen by the likes of EasyJet, TUI Travel and IAG.    

While the prospect of another lockdown is hugely unhelpful for the retail sector at least the UK government hasn’t made the mistake the Welsh government made in banning supermarkets from selling non-essential items. Among the best performers in early trade are Tesco and Sainsbury's, along with Just Eat Takeaway. Also on a positive note, Ocado has said it expects full-year EBITDA to come in well above its previous guidance of £40m, at £60m, sending the shares sharply higher in early trade. This may bode well for Marks & Spencer’s latest numbers when they report later this week, given their recent deal with Ocado which began back in September. The company also said it was acquiring Kindred Systems and Haddington Dynamics, two companies that specialise in robotics manufacture for a combined $287m, as it looks to streamline the picking functions in its automated fulfilment centres

On the flip side of the retail coin, the likes of general retailers are under pressure this morning, as markets mull a further hit to profits on what is normally the busiest time of year for the sector, in the lead-up to Christmas and the potential loss of Black Friday and Cyber Monday business, with Next and JD Sports among the worst performers, with Cineworld also sharply lower.

Primark owner Associated British Foods, who are expected to announce their full-year numbers tomorrow, have said that they expect to see a sales loss of £375m as a result of these new restrictions. It should be remembered that Primark has no online sales presence so the upcoming shutdown will hurt them more than most. Any expectation that the company might announce a full-year dividend tomorrow has also disappeared as the company looks to shore up its finances over the winter period.

The expected closure of betting shops has prompted GVC Holdings to say that they expect a hit to EBITDA of £43m across Europe and the UK if the current restrictions remain in place for the whole month. On the other side of the coin, the likes of Tesco and Sainsbury, which will continue to trade as normal in the lead up to Christmas.

Building materials company Howden Joinery also updated the market, with a significant rebound in trading in the aftermath of the shutdown in Q2. UK revenue for the period 14 June to 31 October saw in excess of a 10% rebound over the same period a year ago, as pent up demand helped propel a surge in activity. The company also said it would be repaying the £22m it received under the government's job retention scheme.

The pound is lower on the day despite rising optimism about progress in UK/EU trade talks, with concerns about the new lockdown overriding the more positive trade narrative. There does appear to be some positive smoke signals coming with respect to progress on fishing, which has proved thus far to be a significant obstacle. Markets will be paying particular attention to Chancellor of the Exchequer Rishi Sunak this week as he outlines further support for businesses most exposed to the latest lockdown restrictions.

The latest October manufacturing PMIs from the likes of Spain, Italy, France and Germany are an oasis of good news on a morning of gloom, coming in at 52.5, 53.8, 51.3 and 58.2 respectively, and all better than expected. This could be as good as it gets, however as they are all prior to new lockdowns being announced and are likely to be more than offset by dire services numbers later this week.  

Oil prices, not surprisingly, having seen a huge fall last week, have continued to slide this morning as demand concerns push prices to their lowest levels since June when restrictions from the first lockdowns started to get eased.

US markets, having come off one of their worst weeks since March, look set to open modestly higher later today, as the US election race moves into the final strait.

The upcoming shutdowns across Europe will also hit the already struggling cinema sector, with AMC Entertainments latest numbers expected to paint a bleak outlook.

The sector was already facing its fair share of challengers before the arrival of the pandemic. The arrival of the competitive streaming markets was already making it hard to compete, and the closure of cinemas as a result of the economic lockdowns merely compounded those problems. While attention has been focussed on the survival of Cineworld here in the UK, AMC Entertainments problems are no less serious, with the company seeing revenues plunge to $18.9m in its Q2 numbers, from $1.5bn in the same period a year ago.

The owner of the Odeon chain and IMAX cinemas posted a net loss of $561m in Q2, with the company warning as recently as three weeks ago that it could run out of cash by the end of this year. The second postponement of the latest James Bond film “No Time to Die” for next month has once again thrown the future of the entire industry into doubt, as the absence of big new blockbuster releases serves to keep customers away. At a time like this the movie studios and the cinemas need to be working together, given their symbiotic relationship. AMC has agreed a deal with Universal to shorten the theatrical window to 17 days, with Universal giving the theatre a proportion of the revenue when selling directly to consumers is a start, but it’s not a silver bullet. Unless movie studios step up, cinemas as we know them will cease to exist as the business model dies.


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