With both the Stoxx600 and the DAX making new record highs this week, European markets have taken a bit of a pause today as investors mull over whether there is scope to drive stocks much higher against a backdrop of a coronavirus, which appears to be starting to spread beyond China to Japan and South Korea, as cases there rise, with millions of South Koreans being urged to stay at home.
This caution is entirely understandable, given that recent gains in global stock markets have been predicated on the basis that any ripple out effects from the coronavirus are likely to be transitory in nature, and yet the main headlines appear to show that it is spreading out beyond China. While these concerns are entirely valid, the lack of significant downside today suggests that while investors are concerned about the virus moving beyond China’s borders, they still remain some way off from looking to move out of stocks in the short term.
The FTSE100 has stood out today, largely as a result of the weaker pound which has hit its lowest levels against the US dollar since November, with the FTSE250 hitting a one month high, led by Moneysupermarket.com, who posted a rise in pre-tax profits to £116m from £106.9m in 2018, helped by a 9% rise in revenues.
In other company news we’ve seen a positive reaction to Lloyds Banking Group latest full year numbers. Statutory profits fell by 33%, to just over £3bn, however this was largely expected due to the large PPI provisions taken in Q3. By and large the numbers were fairly encouraging and on the plus side at least the PPI saga looks to be finally behind the bank with CEO Antonio Horta-Osorio expressing optimism about the future, and the post Brexit future of the UK economy.
Defence contractor BAE Systems shares hit a one year high after reporting its latest full year’s numbers. Annual sales rose to £20.1bn, a rise of over 10%, with operating profits rising to £1.9bn, due to its involvements in the various F35, Typhoon projects as well as the HMS Prince of Wales.
In terms of its guidance the recent acquisition of US Collins Aerospace and Raytheon’s Tactical Radio business is expected to help boost earnings potential in 2020, however management projections don’t appear to be including these in their forecasts. If anything the guidance appears cautious, with some concerns about making higher provisions in respect of pensions.
Medical devices maker Smith and Nephew shares are also higher after delivering an improvement in in its full year numbers of 4.4%, with full year revenue coming in at £5.1bn. Operating profits were slightly lower, however this was in line with expectations with the company saying that it expected revenue growth for 2020 to come in between 3.5% and 4.5%, assuming the fallout from the coronavirus was contained to within Q2.
On the downside Imperial Brands is the worst performer as investors continue to rotate out of it after a raft of downgrades this week, over concerns about dividend sustainability and vaping concerns.
Engineering company Aveva Group also updated investors today, and while management said that trading for the ten months to date was strong in its rental and subscription division, the company did warn that disruption in China would impact sales there. This prompted some profit taking in the shares with the shares falling sharply after initially opening and posting a new record high in early trading.
In signs that investors remained concerned about the retail fallout from the coronavirus in Asia, Burberry shares slipped back over worries that that their Asia exposure would mean that they fall short of their forecasts for the current financial year.
After yesterday’s record highs US markets slipped back on the open as investors took the opportunity to lock in some profits from this week’s gains.
On the data front the US economy continues to operate in a silo of its own, separate from the rest of the world, as weekly jobless claims came in at 210k, slightly above last week’s 206k, while the latest Philadelphia Fed Business Index saw economic activity surge to 36.7 in February, well above expectations of 11.
With US markets consistently posting record highs on a weekly basis it is perhaps not surprising that we are starting to see consolidation in the brokerage sector, as the chase for new customers intensifies in respect of chasing new clients, and commission fees for trading get squeezed even lower.
Last year Charles Schwab bought TD Ameritrade for $26bn, and today US bank Morgan Stanley announced that it is looking to expand into the mid-tier money and wealth management space, by paying $13bn to buy E-Trade’s over 5m retail accounts, which not only boosts its assets under management to in excess of $3trn, but also opens up cross selling opportunities for its services and products to a whole range of smaller investors. This is a hefty price tag in what is a low margin industry, raising the prospect that this could mark another warning klaxon that suggests we could be near a market top. Last year E*Trade revenues were just shy of $2.9bn with net income of around $1bn.
In earnings news ViacomCBS posted a Q4 loss of $258m as the new merger got off to a rocky start, as revenues came in short of estimates. The company blamed a variety of charges related to the recent merger for the loss, however these still can’t disguise the fact that revenues came in short.
In what is becoming an increasingly crowded streaming and cable market there will inevitably be winners and losers, and management will be hoping that they don’t end up as the latter, as the fight gets taken to Netflix, Disney and Amazon Prime.
The pound has continued to come under pressure in the last couple of days, despite economic data that by and large has been better than expected. Retail sales in January rebounded strongly by 1.6% excluding fuel and autos, over double expectations of 0.8%. This merely serves to reinforce the belief that consumers were biding their time in the wake of the political uncertainty at the end of 2019.
The US dollar has continued to sweep all before it, posting its best levels since April 2017, against a basket of currencies. It has continued to pummel the Japanese yen, with only the Canadian dollar managing to hold its own against the greenback in the last five days.
A large part of this week’s yen weakness could well be down to an expectation that the Japanese economy could well slip further into the mire after this week’s shockingly bad GDP numbers. One reason for the strength of the Canadian dollar may well be down to this week’s rebound in crude oil prices.
With the US economy continuing to hold up well it seems likely that the US dollar will continue to rise, particularly since Fed officials appear in no hurry to cut rates further.
Gold prices have continued to edge higher, touching their best levels since 2013 despite Chinese officials embarking on new measures to support the economy. While this is broadly welcome it is becoming increasingly clear that the threats from the coronavirus are spreading as new cases get reported in both Japan and South Korea.
The rise in oil prices over the last few days has been quite significant and while the rebound has seen it hit its best levels in one month the context needs to be set against last week’s plunge to one year lows. An expectation that the after effects of the coronavirus may well be transitory has helped with the rebound, though you have to think that for there to be further gains investors will want to get confirmation of that. For now the risk around supply threats is helping to support prices.
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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.