Stock Watch

FTSE 100 underperforms amid Hong Kong woes, gold jumps, Alibaba dips

CMC Markets

The FTSE 100 is underperforming against its continental counterparts as US-China tensions rise. 

Europe

Beijing are keen to tighten their grip on Hong Kong which is why the Chinese government are set to impose a national security law on the district. Last year there was protests and civil unrest in the territory as the Beijing administration were trying to put Hong Kong further under its influence. The latest development is likely to trigger protests. President Trump effectively sided with Hong Kong last year so he is likely to do the same if the situation escalates, and that might renew US-China trade tensions, which is why equity traders are a little nervous.

On the FTSE 100, HSBC and Prudential are the biggest fallers in terms of index points as the companies have larger exposure to the Far East. The weakness in the oil market is weighing on BP as well as Royal Dutch Shell.     

Burberry shares have seen some volatility today as they initially traded lower, but they have been in positive territory for the remainder of the session. The pandemic has had a very negative impact on the group in terms of shops and manufacturing. The latest political tensions surrounding Hong Kong could be a new problem. It is worth remembering the unrest in the territory hurt the business last year. As far as today’s numbers go, full year operating profit fell by 57% to £189 million. Fourth quarter comparable sales fell by 27%, which was slightly better than their forecast of a 30% drop.  China as well as South Korea have reopened elements of their economies, and that has benefitted the fashion house as sales in the regions since the start of April have been ahead of last year’s numbers. This is encouraging as it might be a blueprint for shops in other parts of the world. Manufacturing operations in Italy are restarting too. Burberry is in a strong position in terms of liquidity as its cash and credit are £887 million and £300 million respectively. The final dividend was scrapped in an effort to conserve cash. The Covid-19 crisis continues to be an issue for the group as 50% of the store networks are closed, and the first quarter will be severely impacted. No guidance was issued.

United Utilities confirmed that full year underlying operating profit increased by 8.6% to £743.9 million, exceeding the £648.5 million consensus estimate. The rise in profit was attributed to a tick higher in revenue, and a £4 million dip in operating expenses. The group has a healthy liquidity position as it stands at roughly £1.2 billion. The total dividend was 42.6p, which was a slight increase on last year’s 41.28p, but the dividend policy will be reviewed in light of Covid-19 and AMP7.

Wetherspoon will spend £11 million on new health and safety measures on pubs for when they reopen. Social distancing policies will be introduced, hand sanitisers will be located in the pubs, and customers will be encouraged to use contactless payments or the app, but cash will be accepted. The group is doing its prep work now, and it will be in a good position for when the government gives the greenlight to reopen pubs.  

Go-Ahead Group warned on profits, hence why the stock is deep in the red, although, it is off the lows of the session. The transport industry has been hammed by the pandemic as people are avoiding public transport. The firm now predicts that full year operating profit will be £63-£75 million, which would be a substantial fall from the £121 million posted last year. In an effort to keep an eye on its outgoings, the company suspended its dividend in March, and today it predicted that capital expenditure will be in the region of £90 million, while the previous guidance was £140 million.  

Bruno Le Marire, the French finance minister, warned that Renault could disappear if a rescue plan isn’t in place. The car manufacturer is in talks with the French government for a bailout package that could be worth €5 billion. The stock hasn’t moved much today so traders are clearly not that afraid of the company going to the wall.  

Future shares are up 10% after the company posted a 77% rise in first half operating profit. The media company is one of the best performers on the London market today.

US

Equities are marginally lower amid the rising tensions between the US and China. Overnight, Beijing said they are committed to the trade deal they struck with the US in January, but given what is going on in relation to Hong Kong, traders are worried the relationship might deteriorate. To add to the mix, the US government appears to be making it more difficult for foreign firms to list in the US – the move is seen a deliberate play against China. Dr Anthony Fauci, a medical expert in the field of infectious diseases, said the results of the Moderna trial – for a potential Covid-19 vaccine – were ‘promising’. That is possibly that’s why stocks haven’t fallen further as some optimism is doing the rounds in relation to health crisis.    

Deere’s second quarter figures were well received. Revenue was $9.25 billion, which comfortably topped the $7.69 billion forecast. EPS were $2.11 and the consensus estimate was $1.62. The company predicts tough times ahead as it expects total global sales to fall by 30-40%. Deere have raised $4.5 billion in medium-to-long term financing as a way of bolstering its balance sheet. The stock is up slightly.  

Alibaba benefitted from the lockdown just like other e-commence giants. Fourth Quarter revenue jumped by 22% to 114.31 billion yuan, while equity analysts were anticipating 107.04 billion yuan. The company earned 9.2 yuan on an adjusted basis, topping the consensus estimate of 6.1 yuan. Cloud computing revenue increased by 58%. The company is in the spotlight because of the tougher US listing rules.

FX

The US dollar is higher as traders are seeking to hold a lower risk currency in light of the tensions between Washington DC and Beijing. The greenback fell in the first three days of the week so it was relatively cheap before the political headwinds picked up - it was in a prime position for a flight to quality play.

GBP/USD is lower on the day on the back of the dreadful UK retail sales figures as well as the UK government’s borrowing numbers. Retail sales in April plunged by 18.1% - the worst reading on record. Public sector net borrowing surged from £2.32 billion in March to £61.4 billion in April – the cost of the pandemic to the British government is starting to show.

The CMC AUD index and the CMC CAD index are down 0.37% and 0.35% respectively, as lower metal and energy prices have weighed on the ‘commodity currencies’.   

Commodities

Gold has rebounded from yesterday’s decline as the rising political tensions between the US and China has prompted some traders to snap up the metal as it is considered to be lower risk. President Trump has form when it comes to getting involved in relation to Hong Kong, so this latest development could play out for a while, and therefore gold’s demand might remain high.

The oil market is lower as dealers are worried about China’s demand levels seeing as the country didn’t declare a growth target for 2020. The Chinese economy has been cooling for years so the coronavirus crisis will be a huge spanner in the work in terms of growth, and there are worries that demand will fall. Yesterday the energy hit its highest level since early April so dealers were quick to dump their long positions.    

 

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