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European stocks pause as World Bank forecasts worst global recession since World War 2

CMC Markets

Last night’s close for US markets saw the S&P 500 follow the Nasdaq as this year’s entire losses disappear after yet another upward leg, as the Federal Reserve announced some further tweaks to its Main Street lending programme, which relaxed some of the criteria to allow more companies to participate in it.

The rebound from the March lows has been nothing short of astonishing, given the current economic backdrop, but also not altogether surprising when you consider that the US central bank is more or less generating a put under every single US company. They are doing this by not only being extraordinarily accommodative, but by also expanding their interventions to buying corporate bonds, and also acting as lender of last resort to the real economy.  

Markets here in Europe have opened a little more mixed, sliding lower in early trading, and in comparison, to markets in the US haven’t performed as well, though the DAX isn’t far off from reversing its losses for the year, by virtue of similarly significant fiscal, as well as monetary policy interventions.

With the World Bank forecasting the worst global recession since the second world war, and emerging markets set to be hit the hardest, the disconnect between economic reality and the rebound in stock markets could not be starker. On the data front it’s not too surprising to see that German trade collapsed in April, with a 24.5% decline in exports, and a 16.5% decline in imports as the lockdowns across Europe brought economic activity to a virtual halt.

The FTSE 100 opened slightly lower with the main drags being financials, airlines, and a disappointing first-half update from British American Tobacco. While the company maintained its commitment to its dividend, management downgraded their outlook for the year from revenue growth of 3% to 5% range to the 1% to 3% range due to the impact of Covid19 and lockdowns adversely affecting its emerging market business more than expected. Weakness in Bangladesh, Vietnam and Malaysia was particularly pronounced, while the lockdown measures in Argentina and Mexico also acted as a drag. The ban on tobacco sales in South Africa also remained in place.

On the plus side engineering software provider Aveva Group announced its latest full-year numbers, which showed a solid performance all round. Revenues rose 8.8% to £833.8m while profits before tax rose 97% to £92m. More importantly recurring revenues saw a decent increase rising 25.7% to £518.5m, with decent growth across all of its regions. On an even more encouraging note, particularly with respect to cashflow, recurring revenues accounted for 62% of total revenue, thus meeting managements medium term target of having a 60/40 mix. The introduction of AVEVA Flex appears to have helped greatly in this regard, with strong demand for cloud-based solutions.   In terms of the outlook there was some caution expressed in respect to the first six months of the year, however Aveva said it remained confident in growing the percentage of its recurring revenue, as well as Cloud revenue in the year ahead. The final dividend was maintained at 29p per share.

As lockdowns continue to get eased Bellway Homes has become the latest housebuilder to update investors on how it is handling the return to work. Construction as restarted on 230 sites, albeit at a slightly slower pace, with all sales offices reopening on 1 June. The order book is slightly lower from this time last year, down at 6,038 homes, compared to 6,312. In terms of sales 6,721 homes were sold, compared to 7,674 in the same period a year before, a sizeable drop but not surprising if you lose the last few weeks due to being closed down. Guidance remained suspended until the changes to working practices gave a clearer picture on how the changes to these practices have slowed the pace of completion numbers.

British Airways owner International Consolidated Airlines, and easyJet, are on the slide, pulling off their highest levels since mid-March, as the UK quarantine goes into its second day.  

US markets look set to open lower after last night’s late surge, dragged lower by some of the weakness we’ve seen in today’s European session, as we look ahead to the start of today’s Fed meeting. One of yesterday’s big movers, Tesla made a record close just below $950 on the back of a report that the company had seen a 205% increase in sales of its Model 3 in China for the month of May.

On the earnings front we’ve got the latest Q4 numbers from Jack Daniels maker Brown-Forman which has seen its share price recover quite nicely from the declines seen in the March sell-off. The company has managed to navigate the increase in tariffs that it was on the receiving end of in the US/EU trade spat. In the first half of the year Brown Forman was able to report a 5% increase in net sales to the tune of $1.8bn, driven largely by a decent US market performance, driven by good sales of its new Tennessee Apple brand. In May the company announced that it would be paying a dividend of $0.174c a share, due on 1 July, despite revising its full-year outlook lower in March, as a result of slowdowns in its international markets. In Q3, EPS come in at $0.48c a share, however in Q4, due to the various global lockdowns this is expected to fall back to around $0.29c a share.

We’ve also got the latest numbers from cinema owner AMC Entertainment. Last week AMC outlined the size of the fiscal hole it was in. Having come off a Q4 loss of $13.5m, the company announced it was taking a Q1 impairment charge of between $1.8bn and $2.1bn, which would equate to a net loss of over $2.1bn. Even without the impairments the company would have made a loss of $224.5m, with revenues sliding to $941.5m. Management have said further delays in reopening could well see the company struggle to survive, and even if they do, they may not get the footfall in any case. The shares are currently trading near $5, well over 80% down from their $35 peaks back in 2016.

 

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