Last night's Fed meeting turned out to be every bit as dovish as was expected, with the US central bank painting a fairly subdued outlook for the US economy.
While the main focus was on the downgrades to its economic predictions and the length of the recovery, what was particularly notable was Federal Reserve chair Jerome Powell's comments on the jobs market, inequality and financial markets. He said that inequality was likely to continue for the next four decades, and that millions of people could well be out of work for some time, a tone that appears to have reverberated into today’s session in Asia.
He also said it wasn’t the Fed’s role to care too much about asset prices and whether they were too high or not, indicating that the central bank’s main role was to support the US economy and to keep the financial system afloat. This candour appears to suggest that the huge amounts of liquidity from the Fed are unlikely to be reduced any time soon.
While the US dollar sank, the stock market reaction was a little more subdued, before rolling over into the Asia session, with Powell’s dark outlook about the future hanging over sentiment, as well as reports starting to surface of a second wave starting to appear in the US as the economy there starts to reopen.
An increase in cases in Florida, Texas and California have caused some alarm that while economies elsewhere appear to be getting on top of the virus, there are some pockets in the US economy which may take a lot longer.
A combination of these two factors appears to have infected sentiment in Asia markets with sharp falls there today, and this also translated into sharp falls today for markets in Europe with the FTSE 100 falling to its lowest levels since 2 June. The DAX has fallen back to its 200-day MA.
Up until yesterday financial markets didn’t appear overly concerned about the prospect of a second wave, however those OECD predictions which outlined the potential hit of a second wave to GDP prospects, appear to have concentrated minds in the wake of recent gains, and sending the usual suspects of travel, as well as oil and gas stocks sharply lower, led by International Consolidated Airlines, Carnival and Intercontinental Hotels. Oil prices have also come under pressure, as concerns over a second wave compress expectations for demand over the rest of the year.
Just Eat Takeaway shares slid sharply yesterday after it was reported that the company was in talks with GrubHub in the US about an all share deal between the two. The deal came about after Uber, which had been in talks with GrubHub, pulled out of a possible deal over US antitrust concerns. With Just Eat Takeaway having no presence in the US and GrubHub none in Europe the deal won’t have the same concerns with US regulators that came with Uber. In what seems like a win-win for both companies the only concerns appear to be around that Just Eat Takeaway is biting off more than it can chew, having only just completed its recent UK and Netherlands tie-up, and following on from the $1bn spent on acquiring the German operations of Delivery Hero in 2018. The deal which is set to be worth $7.3bn and will create the world’s largest food delivery company outside China, by revenue, will have over 70m customers globally, and which will be put to the respective shareholders is expected to complete in the first quarter of 2021.
Ocado shares are also in focus this morning after it announced that it had raised £657m on the back of a share placing, as well as £350m on the back of a convertible bond offer, due in 2027, on an expectation that the on-line delivery space for groceries will take off in the months and years ahead. The company has already signed a number of deals with high profile grocery chains in the US, France and Canada, and earlier this year sold half of its retail business to Marks and Spencer. For now, the company’s valuation appears based on the hope that its revenues will grow exponentially as the world’s supermarkets do more of their everyday business online.
Unilever appears to be having another go at merging its Rotterdam and London operations, only this time London is set to be its main headquarters, and the company said it would also keep its various listings in London, Amsterdam and New York. This is certainly a much less contentious proposal than the previous one which proposed moving the headquarters to Rotterdam, and delisting its London shares. It’s a pity they didn’t go down this route before, it certainly would have been much less contentious.
Babcock International also released its full year numbers, posting a loss of £164.9m, due to £502.9m in exceptional items, which comprised of some goodwill impairments, as well as other write-downs in relation to oil and gas assets. Babcock shares have slipped sharply in early trading, with investors focussing on the weakness in its oil and gas aviation division, over the size of its £35bn order book, which includes the construction of a Type 31 frigate. Underlying free cash flow was also lower than expected coming in at £192m compared to the FY20 guidance of £250m with the impact of Covid-19 reflecting the shortfall.
TalkTalk Telecom also released its latest full-year preliminary results, and they draw the curtain down on what has been a challenging year for the business. Having postponed the sale of FibreNation just prior to last year’s general election, the transaction finally went through in the first quarter of this year, for the sum of £200m. The timing could not have been better given the shutdown of the UK economy, giving as it did TalkTalk a decent buffer to its balance sheet for the uncertainty to come. The company has made progress in accelerating its Full Fibre broadband base by 34%, and posting a statutory profit before tax of £131m, up from a loss of £5m a year ago.
US markets look set to open sharply lower later today in the wake of last nights Fed meeting, as well as the concerns over rising infection rates in Texas, Florida and California. Weekly jobless claims look set to rise again, albeit at a slower rate than the previous week with another 1.5m added to the weekly total. Continuing claims look set to fall back to 20m from 21.49m.
Disclaimer: CMC Markets is an order execution-only service. The material (whether or not it states any opinions) is for general information purposes only, and does not take into account your personal circumstances or objectives. Nothing in this material is (or should be considered to be) financial, investment or other advice on which reliance should be placed. No opinion given in the material constitutes a recommendation by CMC Markets or the author that any particular investment, security, transaction or investment strategy is suitable for any specific person. The material has not been prepared in accordance with legal requirements designed to promote the independence of investment research. Although we are not specifically prevented from dealing before providing this material, we do not seek to take advantage of the material prior to its dissemination.