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Deliveroo lands with a thud, Europe slides back as France and Italy look to tighten restrictions

Deliveroo underwhelms on its debut

Europe

It’s been a somewhat subdued end of the month and the quarter for European shares in today’s session, as we look back on a quarter that has seen some fairly decent gains across the board, despite the various lockdowns and restrictions.

The markets main focus has been directed towards the prospects for an economic reopening and while that prospect is much closer in the US and the UK, there is some anticipation that Europe will get there eventually, though that optimism could well dissipate if we don’t get some progress on vaccinations, as well as evidence of a slowdown in infections.

This prospect looks even further away than ever, given reports from the other side of the Channel that suggest France may well have to go into another lockdown, as President Macron gets set to go on French TV tonight, and deliver the bad news.  

While equity markets have had a good quarter, bond markets haven’t, with big falls in the price of longer-term bonds, sending yields sharply higher in the UK and US.

At the end of last year UK gilt yields were at 0.197%, and are now above 0.8%, while US 10-year yields were at 0.913%, and are now above 1.7%. Fortunately, these moves higher have been contained to the longer end, though borrowing costs have edged higher on 2-year paper too, with UK yields rising from -0.16% to 0.08%.

Oil prices have also seen strong gains, with Brent crude up 25% so far this year, and while the energy sector is down today, a lot of the rebound seen in equity markets this year has been as a result of stronger commodity prices, with copper also up over 10%.

Amongst the best performers today is Hikma Pharmaceuticals, which is higher on the back of a broker upgrade from Jefferies.  

Swedish retailer H&M has seen its shares slip back today after reporting a loss of Skr1.39bn, which although was slightly better than expected, was overshadowed by the recent headlines out of China that has seen the brand, along with others, embroiled in a storm over a statement the company made last year which expressed concern over the use of forced labour in Xinjiang. Management said that around 20 of its stores in China were closed as a result of the backlash, and that they still wanted to do business in the region.

The various lockdowns have hurt the retailer’s revenue, with around 1,800 stores temporarily closed, however as optimism over a reopening has risen sales in the month of March have shown signs of improvement, up 55%. Gross margins were also lower at 47.6%, down from 51%, as the company looked to markdown and shift its stock.

When it was announced earlier this year that Deliveroo was looking to list in London there was a great deal of enthusiasm for a company that isn’t too different from its peers like Just Eat Takeaway and Uber Eats.

Early indications of a bumper valuation were soon pared back over concern about working practices, a lack of profits and a dual class structure for the shares, which soon punctured the early optimism, prompting management to adjust the IPO price range lower, as a number of major investors said they would not be buying the shares.

This lack of confidence in the business model has quickly been reflected in a disastrous first day of trading for the newly listed company, that saw the shares slide over 30% in the first 15 minutes of trading, before trading was halted.   

It would appear that the litany of negative headlines has taken its toll over the past few days hitting confidence in what is still a well backed business.

If today’s price action is any indication of investor enthusiasm on the likes of profitability, cash flow and growth prospects, as we head towards an economic reopening, then today’s weakness could well be a warning sign of further declines in a sector that has done quite well over the last 12 months.

Today’s weakness hasn’t been helped by a similar lacklustre performance in the likes of Just Eat Takeaway, whose shares are languishing, just above their 10-month lows.

A lot has been made about what this tells us about London as a hub for IPO’s compared to the US, given the slide in the shares, but any IPO is about confidence and the underlying backdrop. Its hard to see how much better this IPO might have done in the US given the current environment. Of course, it could have been priced a lot more realistically, which might have made a difference to the overall outcome, but that’s another question entirely.

US

US markets opened modestly higher today as investors look to further details on the upcoming $3trn or so infrastructure plan, details of which have been leaking out all day, and which are likely to be set out later today, by President Biden.

The latest ADP payrolls report for March showed that 517k new jobs were added while the February number was revised higher from 117k to 176k.

The latest Chicago PMI numbers showed another decent expansion coming in at 66.1, well above expectations of 61.

With respect to company earnings Walgreens reported Q2 numbers that came in ahead of expectations. Having reported better than expected numbers in Q1 with an increase in revenues of 5.7% to $36.31bn, and profits that also beat expectations at $1.22c a share, they appear to have repeated the same trick twice, with Q2 profits of $1.40c a share, while also raising their full year forecasts.

The ramping up of the vaccine rollout in the US is helping to offset a weak performance in other areas due to weak sales of cold and flu remedies, and lower sales in its UK Boots operation.

BioNTech shares are also higher again in the wake of yesterday’s well received Q4 numbers, after a trial in 12–15-year-old children reported 100% efficacy of the joint Pfizer Covid-19 vaccine.  

After their big sell off this week Discovery shares are continuing to rebound as a number of brokers start to turn positive and see some value, though the jury remains out on ViacomCBS.

FX

The euro has continued to look soggy after the latest March inflation data came in lower than expected. A rise in energy prices as well as weak base effects was expected to translate into a sharp move higher, however these risks turned out to be overstated, as headline CPI rose to 1.3%, while core prices actually weakened, slipping back to 0.9% from 1.1%.

The single currency hit its lowest levels against the US dollar since 4th November last year, as yield differentials widened in favour of the US dollar, while it is also sinking against the pound for similar reasons.

The US dollar has continued to build momentum, putting in three successive monthly gains as the US recovery story threatens to leave the European recovery story in the dust.

Commodities

Having seen such a strong Q1, crude oil prices have started to slip back from their recent peaks, ahead of tomorrow’s OPEC+ meeting, which could see members extend production curbs for another month into June. The situation in Europe appears to have prompted a re-evaluation of the demand outlook in the short term, despite the Suez Canal blockage raising concerns about short term supply. The latest inventory data appears to show stockpiles are decreasing again, as consumption starts to pick up and with the US driving season about to get underway today’s decline in gasoline stockpiles is likely to limit any significant downside.

While Bitcoin has had a really strong quarter, gold prices have had a nightmare, on course for its worst quarterly performance in years, driven down by rising US yields and a stronger US dollar, as the allure of the yellow metal as a haven is dulled by rising acceptance of cryptocurrencies as a form of value, for investors who appear to be much less risk averse. 


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