News

ECB adds extra stimulus, indices dip, American Airlines takes off

CMC Markets

Stocks are a little lower even though the European Central Bank (ECB) ramped up the Pandemic Emergency Purchase Programme (PEPP) by €600 billion, so it now stands at €1.35 trillion.

Europe

The plan has been extended to June 2021 too. Going into the meeting there was speculation it would be boosted by €500-€750 billion so the size of the extra stimulus was roughly in the middle of the consensus estimate range. The ECB predicts the eurozone economy will shrink by 8.7% in 2020, and then see growth of 5.2% and 3.3% in 2021 and 2022 respectively. Christine Lagarde, the ECB chief, said they saw signs of the economic slump bottoming in May, so there was some positive news amid the update. Ms Lagarde is confident the situation in relation to the German constitutional court won’t be an issue for the bank’s plans. The eurozone had major structural problems going into this crisis – high unemployment and high debt – so there is a view in the markets the ECB will remain on the easing path for some time to come.    

Aston Martin revealed restructuring plans. The firm will cut 500 jobs as a part of its wider turnaround plan. The luxury car manufacturer in recent months has received a cash injection, and its senior management has changed too. The reorganisation plans that were announced today will cost £12 million, but it will save money across operations, capital expenditure and manufacturing, which would equate to savings of nearly £30 million. High-end brands tend to hold up better during an economic downturn, as the mega-rich can weather the storm better than middle and low income earners.

HSBC and Standard Chartered know what side their bread is buttered on as the banks have expressed support for China’s controversial national security law, which relates to Hong Kong. The law in question will undermine Hong Kong’s autonomous status and it will give the authorities in Beijing more control over the territory. The UK-listed banks have taken China’s side as it is clear they want to cosy up to the second largest economy in the world.

Lookers shares saw a lot of volatility today as the company announced a restructuring plan, which would include closing 12 car dealerships. The group plans to reduce the headcount by 1,500 in a bid to conserve cash. The restructuring programme will cost the firm £9 million, but it would save £50 million in terms of payrolls. The company has confirmed that operations have reopened but there has been a large drop-off in capacity. The car dealership group was under performing even before the pandemic, and it closed down 15 sites at the back end of last year. The full year results were delayed on account of an investigation being carried out about suspected fraudulent transactions. Lookers said the investigation is nearly completed and the financial results will be posted later this month. The firm is in a good position in terms of liquidity as it has access to a £250 million banking facility.

Youngs said the closure of pubs in the final 10 days of the last financial year caused a £7.7 million hit to profit. Full year adjusted profit before tax pre-IFRS 16 was £38.5 million, and that was a drop of 11.3% on the year. The company is hoping to reopen its pubs in early August, so the government’s rules in relation to the lockdown will be in focus. Youngs are predicting that next year’s performance will be materially below average, and it also expects that sales won’t return to normal levels until 2022.

US

The S&P 500 is basically flat while the NASDAQ 100 set a new intraday record high, so sentiment is a little mixed. The slight increase in US-China tensions - President Trump wants to ban flights from China - has given traders an excuse to lock-in some recent profits. The US jobless claims reading was 1.87 million, which was slightly higher than economists were predicting, but it was a decline from the 2.12 million posted in the previous week – it’s ninth consecutive weekly fall.   

At the end back of last year it was announced that LVMH would acquire Tiffany for $16.2 billion, but today it was reported that LVMH will not acquire Tiffany shares in the open the market. There is now speculation that LVMH are looking to renegotiate the terms of the deal. In light of the bleak economic outlook, it is not surprising the French listed firm might be trying to acquire the jeweller at a lower price. Tiffany said they will take legal action against LVMH if they try to backtrack on the price.

Slack Technologies will report their first quarter after the US market has closed. The messaging service has become popular on account of the lockdowns because of the surge in the number of people working remotely. In a similar vein to Zoom, the stock price has rallied recently as traders feel the pandemic will speed up the shift to increased working from home. The loss per share is tipped to be 6 cents.  

American Airlines shares are up today as the group plans to operate 55% of its domestic schedule in July, and that is a big increase from the 20% level they originally posted last month.    

FX

EUR/USD hit a level last seen on 12 March thanks to the ECB’s update. The colossal expansion of the PEPP has boosted the single currency as dealers are taking the view the aggressive stimulus package will help the currency area.

GBP/USD was in the red this morning but it is now showing a tiny gain as the dollar has come under pressure from the single currency. The dollar bears didn’t need much of an excuse to step into the fold seeing as the US dollar index has fallen for the past seven sessions. Construction activity in the UK has rebounded from almost non-existent to dreadful as the construction PMI reading for May was 28.9, a big improvement from the 8.2 registered in April.   

Commodities

Gold is back above the $1,700 mark as the mixed sentiment in stocks has given dealers an excuse to buy into the metal – it typically does well when there is uncertainty doing the rounds. The fact that the US dollar index is now in the red has helped the asset too.

WTI and Brent crude are offside as it was reported that OPEC+ have not agreed a production cut level with Iraq. It is typical of the group to have toing and froing over output levels, and sometimes there can be nasty surprises, so it seems as if dealers are trimming their exposure to the energy market for now.    

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