In a sign that sentiment is extremely fragile, the rebound at the end of last week has given way to rising nervousness about a second wave of infections, as a number of countries have started to report an increase in the number of cases as they try and return their economies to some semblance of normal.
Markets in Europe gave up early gains yesterday, as did markets in the US on this basis, while Asia markets have also seen an increase in apprehension as they trade close to their recent rebound highs.
It is perhaps inevitable that we will see infection rates ebb and flow, this was always likely to happen, but what is more puzzling is why markets appear more concerned about that, than they are about the millions of unemployed there are likely to be by year end, as furlough schemes inevitably run their course.
This morning the UK Chancellor of the Exchequer is expected to extend the existing furlough scheme from June until the end of September, albeit at a lower rate of 60% of salary, as some governments start to acknowledge that the back to work process is likely to be choppy and uneven.
On the back of this rising apprehension, markets here in Europe have opened mixed, albeit with a slightly positive bias after yesterday’s declines, as the realisation begins to dawn that the road back to normal economic activity is unlikely to be smooth and seamless.
On the companies front mobile telecoms giant Vodafone this morning announced its latest full-year numbers, against a backdrop of increasing concerns about its ability to compete with rivals like BT Group and Telefonica, who have taken steps to boost their investment spending in order to enact the rollout of full fibre broadband and 5G.
The shares have already lost half their value since the beginning of 2018, on a combination of concerns over rising debt levels, and underperformance across all of its divisions. Last year the company cut its dividend due to concern over the rise in the level of its debt, and this morning the company announced that group revenues rose by 3% to just shy of €45bn, which was slightly below expectations.
Operating profits rose to €4.1bn, however most of this was wiped out by the huge provision six months ago for losses at its Indian operation. The loss for the financial year was better than last year, but still came in at €455m. The company did maintain the remainder of its dividend, while withdrawing its guidance for 2021, and this, along with slightly better revenue growth of 1.6% in Q4 has seen the share push higher in early trade.
Management said that the impact of Covid-19 was likely to be significant as it declined to provide an outlook. The report did outline that the European Towers project remained on track to start adding value from early 2021. The rise in net debt to €42bn was particularly notable, with most of the increase due to acquisition of Liberty Global cable assets in Germany, as well as Central and Eastern Europe.
Supermarket WM Morrison became the latest UK supermarket to announce that its costs rose as a result of measures taken to safeguard its staff as a result of the pandemic. Q1 sales excluding fuel saw a rise of 5.7%, with the last two weeks of the quarter seeing those gains accelerate to 10.8%. In terms of the outlook, the company said they expected to see more of an adverse impact on costs in the upcoming weeks, relative to the most recent quarter. This is expected to offset any gains from increased sales, as more people work from home.
The commercial property sector has taken an absolute beating in the past few years as the retail sector has struggled, with falling rents, and CVA’s helping to exert downward pressure on its revenues. Land Securities hasn’t been immune from this downward pressure, despite its property portfolio being more diverse, and this pressure is likely to increase due to Covid-19.
The owner of Bluewater in Kent and Gunwharf Quays in Portsmouth, is likely to see further pressure on its revenues due to its exposure in hotel real estate, owning as it does a number of Ibis and Novotel hotels around the country. We’ve already seen evidence of this with only 63% of recent collected in March and April with the next two months likely to be worse. The company has cancelled its final dividend, while setting aside £80m for a rent relief fund to help support smaller occupiers, like small businesses, using options of rent deferrals and monthly payments.
Revenues saw a decline of 6% to £414m while losses grew from £123m in 2019 to £837m for this year as a result of rent provisions of £437m.
Ryanair has announced that it plans to restart 40% of its flights from July, with crew and passengers required to wear face masks and pass temperature checks. While this seems to be an eminently practical approach, it’s not likely to be conducive to a relaxing flying experience, notwithstanding the fact that the passengers and crew will still be breathing in the same recycled air, for an extended period.
B&Q owner Kingfisher also reported a sharp 24% fall in revenues in its latest Q1 numbers as a result of the shutdowns in March and April, though some B&Q’s have since reopened with social distancing rules in place.
US markets look set to pick up on this morning’s negative vibe from Europe, with a lower open with the focus set to be on the latest CPI numbers for April, which are expected to show a sharp deflationary bias due to the recent sharp fall in energy prices. Annual headline CPI is expected to see a fall from 1.5% to 0.4%, with core prices falling back to 1.7% from 2.1%. This could well be a temporary phenomenon if supply chain disruptions, and Covid-19 induced shortages causes prices to rise for everyday grocery products.
We will also get to hear from three Federal Reserve board members, Patrick Harker, Randall Quarles and Loretta Mester this afternoon on a day that the US central bank has said it will start buying corporate bond ETF’s, as it follows in the footsteps of the Bank of Japan in expanding the scope of assets it looks to buy in supporting the markets. There has been increasing speculation that the Federal Reserve may well look at pushing rates into negative territory. On any number of occasions Fed officials have pushed back on this expectation, however markets don’t appear to be listening. The Fed needs to push back on this hard given the experience we’ve already seen that the damage negative rates can do to the financial system, as well as bank balance sheets. The Fed cannot allow itself be bullied by the markets, and needs to draw a line in the sand.
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