Despite getting an early week boost from Fed chair Jay Powell’s 60 minutes comments at the weekend, that the Fed had plenty of additional tools to support markets, further progress was rather limited yesterday as doubts resurfaced about the prospects of a Covid-19 vaccine coming to market quickly.
Nagging doubts about the efficacy of reports around recent trials of Moderna’s potential vaccine saw momentum subside as profit taking started to kick in, as US markets slipped back, while Asia markets were more mixed.
This is likely to be a persistent problem in the days and weeks ahead, as sentiment ebbs and flows, according to the fortunes of clinical trials and tests, as economies struggle back to their feet, as lockdown measures are gradually eased.
As such markets here in Europe have seen a similarly cautious open with the FTSE 100 opening lower and below the 6,000 level after closing above it for two days in succession. The biggest decliners have once again been the airline and travel stocks and this is likely to be a familiar theme as the pros and cons over vaccine progress drag their share prices around. Carnival, IAG and Easyjet are all amongst the bigger fallers.
In company news high street bellwether Marks & Spencer reported a 21% decline in full-year profits for the year, however as part of their new “Never the Same Again” strategy there appears to be a strong focus on delivering their turnaround plan in the context of their recent deal with Ocado. On a bright note, there have been early indications that the deal with Ocado is already bearing fruit with increased sales even before Covid-19, with operating profits rising 11.2% before adjustments. The deal has already helped reap a £2.6m profit for the 7 months to 1 March, and is expected to improve further as the synergies increase in the lead-up to the final September switchover.
Rolls-Royce shares are lower after the company announced another major reorganisation of its business, saying that the expected disruption to the aviation industry over the next few years will mean it needs to cut back on its workforce. This means that the company will need to reorganise and restructure the businesses to cope with this new reality of cancelled aircraft orders, which means fewer engines. This restructuring is expected to save £1.3bn over the next two years with the loss of 9,000 jobs from its 52,000-work force expected to amount to £700m of that cost. The Civil Aerospace division will bear the brunt of the losses with the Defence unit being spared.
Information services company Experian is on the up this morning after it announced its latest full-year numbers, finishing the year in a strong fashion. Full-year revenue rose 7% to $5.18bn, with strong gains in Q4 from the US and Latin America. There appears to have been limited impact from the Covid-19 pandemic and as such the company kept its dividend unchanged at 32.5c a share, but given the current uncertainty, the company declined to provide any guidance. The lockdowns already appear to be starting to have an impact in the current year, with April revenues down 5%, which is sustained could see a Q1 decline of around 10% at the higher end of the range. This could translate into a 5% annual headwind for earnings if translated on an annualised basis.
Yesterday we finally got an indication in terms of hard numbers the effect the recent lockdown has had on the UK labour market, as a record 856k people applied for benefits in April, while the level of vacancies also plummeted as businesses retrenched sharply. If anything, the numbers flattered the level of people at risk of losing their jobs giving that over 7.5m people are currently on the governments furlough scheme and there is a good chance that a good number of these people won’t be able to go back to their old jobs.
Today’s inflation numbers weren’t particularly instructive, as they largely reflected the sharp declines in energy prices that we’ve seen in the past few months. While this is normally a good thing, the fact that consumers have been stuck indoors with no way of taking advantage of low fuel pump prices is likely to be of limited benefit. We’ve already seen anecdotal evidence of increases in food prices and other essentials already starting to creep through into the weekly shopping basket, which is likely to limit the downside of any short-term deflationary effect.
Headline CPI for April came in at 0.8%, a sharp fall from March’s 1.5%, and a four-year low, while core prices fell from 1.6% to 1.4%, and PPI input prices showed sharp declines of 5.1% and 9.8% on a monthly and annual basis respectively. The reaction of the pound to this data has largely been muted, with most traders waiting on today’s testimony from Bank of England governor Andrew Bailey, along with deputy governors Broadbent and Cunliffe to the Treasury Select Committee later today.
There has been increased chatter over the prospect of negative rates in recent days from a number of MPC policymakers and it is highly likely that this trio will face questioning from MPs over the prospect of that we might see this form of monetary vandalism here in the UK, when it is quite clear from the experiences of the Japan and the EU that it tends to do more damage than help
US markets look set to open slightly higher despite yesterday’s late falls with the main focus expected to be on the latest Fed minutes later this evening. We’ve already heard from Chairman Powell extensively over the last two to three days so they aren’t expected to be particularly illuminating. They could be instructive in the context over the ongoing debate over negative rates. While Fed policymakers have made noises to the effect that they aren’t looking to implement negative rates their insistence in some cases has been a little lukewarm. This week’s minutes could give us a better insight into their thinking in this regard. We’ve already seen the damage negative rates can do in Europe. It would be foolhardy in the extreme to pursue a similar experiment in the US.
In company news, we can expect hear from top US retailer Target later today, in the aftermath of Walmart’s decent numbers yesterday. One key takeaway from various retailers has been a big rise in costs, along with the rise in revenues. Target isn’t expected to be any different. In April the company warned of precisely this outcome despite saying that same store sales had seen an increase of 7%, due to larger than expected online sales, while seeing lower footfall at its retail stores. Profits are expected to come in at $0.715 a share.
In other news Johnson and Johnson have said they will be discontinuing their baby powder products in the US and Canada, in the wake of lawsuits claiming alleged asbestos contamination. These lawsuits have cost the company billions of US dollars in litigating, and while most of the verdicts have been reversed the damage to the brand has hit sales, thus reducing the value of continuing the product.
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