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FTSE 100 falls to lowest levels since April on lockdown 2 fears

CMC Markets

Any prospect that we might see some form of turnaround Tuesday yesterday proved to be fairly short-lived as markets in the US and Europe fell for the second day in a row. The only exception was the Nasdaq which ended the day higher as tech stocks attracted some haven flows.

With Asia markets also undergoing a mixed session, markets here in Europe have once again opened lower as concerns about a fresh wave of national lockdowns, in the face of rising infection and death rates, undermine sentiment.

It is becoming increasingly apparent that rising infection rates across Europe are now translating into a rise in hospitalisations, as well as a rising death count with both the UK and France posting their highest fatality levels since May as the second coronavirus wave continued to spread across Europe.

Concerns about a second national lockdown in France are also rising ahead of a scheduled national address later this evening by French President Emmanuel Macron. In Germany it is also being reported that Chancellor Merkel is proposing the closure of bars and restaurants for one month, in a move that could well last a lot longer as the weather gets colder.

When equity markets dropped sharply back in February governments in Europe, the US and here in the UK stepped up with massive fiscal support, acting in conjunction with central banks to support their economies. This in turn prompted a strong rebound in equity markets as confidence that politicians would support businesses through what was likely to be a very tough period, helped fuel a rebound in sentiment.

It is not immediately apparent that this fiscal support will be as significant at the second time of asking, hence the sharp slides we are now seeing in equity markets. Firstly, with a US election only a week away, there doesn’t appear to be any political will to deliver a new fiscal package much before the end of Q1 next year. As for the EU they haven’t even signed off their first fiscal package which is so badly needed by Italy and Spain, let alone put together a new one.

Here in the UK the picture is no less clear with the UK government response resembling a type of economic hokey-cokey, one step in, one step out, as the end of furlough, prompts a number of U-turns as the economic outlook deteriorates. This deterioration in outlook puts an increased focus on tomorrow’s European Central Bank rate meeting, however even here the scope to do more is becoming ever more limited due to rates already being in deeply negative territory. In the absence of further fiscal measures there is only so much extra the ECB can do, other than promise to do more on the asset purchase side if needed. If anything, there is a risk that tomorrow’s meeting could well highlight how limited the ECB’s tool box actually is in the absence of a fiscal leg.

Biggest fallers today have been in commercial real estate, with British Land, and Land Securities seeing big losses over concerns that more lockdowns will hollow out their real estate portfolios even further. Travel and leisure are also falling with airlines sharply down, IAG and easyJet, along with hotels, Holiday Inn owner IHG, and Premier Inn owner Whitbread, also down.

In better news from Germany we also got the latest numbers from Deutsche Bank, Germany’s biggest bank and they have continued the positive theme for banks in general in Q3, with the investment banking division helping to drive an increase in profits. Net revenues came in at €5.94bn, helping to drive a net profit of €182m. Fixed income and sales trading revenues came in at €1.8bn well above expectations of €1.39bn, an increase of 47%. So far this year Deutsche Bank has set aside €761m in respect of possible loan defaults, saying that this was likely to be the peak. This seems a pitifully inadequate amount given the challenges facing the German economy and Europe in general, and also a little complacent. In this morning’s latest numbers, they have reiterated this conservative stance, adding another €273m, which would somewhat belie recent events, as well as this morning’s reports that tighter restrictions are coming. While these numbers are certainly encouraging the big question is whether they are sustainable. It is notable that we’ve seen a big reduction in costs, and are likely to continue to do so.

On the retail front Next have said that full price sales were better than expected in Q3, and that full year profit before tax is expected to come in at £365m, an increase of £65m on the previous estimate. There are likely to be risks to this forecast given recent events in Wales, and the risk that we could well see them in the rest of the UK, between now and the end of the year. Next have said that a two-week lockdown would reduce full price retail sales by around £57m. The company set out three scenarios in the event of such a scenario for Q4 with a two-week lockdown suggesting a 20% decline in sales. The worry is that a two-week lockdown would be the starting point, and not an end point, which suggests any risks are very much to the downside in any scenario as we head into year end. Online sales in Q3 have helped drive this improvement, increasing 23.1%, while in store retail sales fell -17.9%, which translates into a decline of -47.2% year to date.

Aston Martin also received a welcome boost after the close yesterday, reporting that Mercedes Benz would be increasing its stake up to a maximum of 20%, as the company looks to safeguard its future on a more permanent basis. The deal, it is hoped, will break the boom and bust cycle that has been a staple of this iconic UK brand. Mercedes will be supplying the technology behind new hybrid and electric power units; however, it also gives them a potential foothold in what is an iconic global brand in a deal, that in the longer term could see the brand subsumed under the Mercedes brand in a manner similar to the way BMW has kept the Mini brand alive.  

Carnival Cruise Lines has also extended its pause in operations for Australia and New Zealand until 31 May 2021, as the economic uncertainty over travel restrictions continues to cloud the outlook.

On the currencies front the US dollar and Japanese yen are attracting flows as investors go into risk off assets. The Bank of Canada is also set to meet for its latest rate decision, with no change in policy expected. US markets look set to continue this negative theme, with a sharply lower open. On the earnings front we’ll be getting to see the latest Q3 numbers from UPS, Beyond Meat, General Electric and Ford, among a host of others.


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