News

Europe slides on virus concerns, as Bank of England leans to the dark side on rates

CMC Markets

Europe

Markets in Europe have come under pressure today, though they are off their lows, as concerns about the economic outlook, and the timing of a vaccine contribute to a prevailing sense of renewed uncertainty, as the World Health Organisation warns about an alarming rise in coronavirus cases across Europe. The WHO’s regional director for Europe expressed concern that weekly cases are now exceeding those when the pandemic peaked in March, and that the increase is a wake-up call for governments all over.

Targeted lockdowns and localised curfews appear to be becoming more commonplace, with the attendant risks they are likely to have on the resilience of the recovery we’ve seen in the wake of the recent easing of lockdown restrictions. 

European car makers have slipped back after car sales for August in Europe showed a 17% fall, following on from a 3% decline in July, with Volkswagen and Renault leading the decliners. 

Banks are also under pressure despite the European Central Bank easing European banks requirements when it comes to their leverage ratios, until June next year, as concerns about the economic outlook continue to intensify.

The talk of negative rates in the UK has also seen the likes of NatWest Group, Barclays and HSBC slip towards the bottom of the FTSE100, with NatWest shares slipping to their lowest levels since May.

All across Europe we are seeing rising infection rates with the European Centre for Disease Prevention and Control expressing concern about the continued rise in infection rates, with Spain leading the way. While this is undoubtedly causing a lot of anxiety, as infections hit record highs, it also needs to be set in the context that a lot more tests are being conducted now than was the case six months ago. Hospitalisations and deaths are still at a fairly low rate, though they are starting to rise again.

Having seen decent trading updates from the likes of H&M and Inditex earlier this week, expectations were high that Next would be able to follow suit when they reported on their latest first half numbers today, and they haven’t disappointed, with the shares rising to the top of the FTSE100.

Today’s update has seen the business report a first half profit before tax of £9m, with full price sales down 33% on a year ago. Total H1 revenues did fall a little short at £1.36bn, with consensus expectations for about £1.57bn.

The company also updated its guidance for the full year, saying that profit before tax is now expected to come in at £300m up from the guidance that was issued in July of £195m, though the decision was also taken not to reinstate the dividend with the economic outlook still so uncertain.

Trainline.com has also reported on its latest H1 numbers which has seen revenues decimated by the various shutdowns, and lower footfall as a result of the lockdown of the UK economy In Q1 group net ticket sales declined £79m, equivalent to 9% of the total from the same period in 2019.

In Q2 this improved to 30% with revenue of £280m, and a total of £359m for the first half. While these numbers are dire, they are certainly better than expected and have helped to push the shares higher on the day.

US

US markets have opened sharply lower, with tech stocks leading the losses, along with travel and leisure stocks, after the WHO expressed concern about rising infection rates in Europe. The Nasdaq and S&P500 are both on the cusp of testing support at this month’s lows, with the key level on the S&P500 at 3,300.

The latest US weekly jobless claims came in at 860k, a modest improvement on last weeks adjusted 893k, while housing starts for August declined 5.1%.

Facebook shares, which came under pressure as a result of reports it was facing an antitrust investigation from the Federal Trade Commission, have fallen further today, as the broader tech sell-off continues.

Snowflake shares have also slipped back as the euphoria of yesterday’s gains starts to dissipate, and some semblance of reality starts to take over.

FX

The pound has come under pressure after the Bank of England kept the door open to negative rates by saying that they are consulting with regulators on how to make them work.

This flies in the face of all the evidence that that we already have about negative rates, and comes across as utterly incomprehensible. The SNB, BoJ and ECB have all tried negative rates, and all have failed, with increasing evidence that they actually do more harm than good. The Swedish Riksbank actually abandoned them due to their being counterproductive. It beggars belief that the Bank of England is looking at an approach that could well inflict more harm than good on the banking and ergo the financial system. As a result we’ve seen the pound slip sharply, along with yields. Some have argued that this narrative is merely a way to keep their policy options open, but why would you go to all the trouble of consulting, if you’re not intent on trying to implement such a move. 

All of this talk of negative rates, rather overshadowed the fact that the Bank improved its outlook for UK GDP. Talk about mixing your messaging.

The US dollar has found some support today in the wake of last nights Fed decision, though this may have more to do with the fact that equity markets are predominantly in risk off mode today, with the greenback reaping the benefit of some safe haven buying.

The Japanese yen has also benefitted from a bit of a safe haven bias hitting its highest levels since July.

Commodities

The slightly firmer US dollar has seen gold prices slide back a touch after they hit a one week high yesterday, while silver prices have also come under pressure as the greenback makes advances across the board. 

Crude oil prices have started to look a little on the soft side, after gaining quite strongly in the last couple of days on the back of supply concerns caused by production disruptions as a result of Hurricane Sally. With prices near one week highs, concerns about the demand outlook have re-emerged prompting a little bit of profit taking, ahead of today’s OPEC+ meeting where there is likely to be discussion over the current level of production quotas.


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