Equity benchmarks are set to finish higher on the day.
Europe
There is a growing sense of optimism the lockdowns have helped contain Covid-19, and a loosening of restrictions seems to be on the horizon. A number of countries have already reopened some small aspects of their economies, and there is hope the trends will continue. Sadly the pandemic is still spreading, but it would appear the growth rate has cooled, so dealers have another reason to be bullish.
BP’s first quarter underlying replacement cost profit came in at $791 million, down from $2.4 billion in the same period one year ago. In an effort to conserve cash, the company plans to cut costs by $2.5 billion. In addition to that, the capital expenditure budget will be $12 billion, which would be approximately 25% below the original projection. The mammoth drop in the price of oil has forced the firm to tighten its belt. As far as liquidity is concerned, BP is in rude health as its liquidity position is $32 billion. It is a little concerning that gearing now stands at 36.2%, up from 31.1%. Lower oil prices and higher debt is not a good combination. The oil titan will press ahead with its plans to pay a 10.5 cents dividend.
HSBC revealed a 48% fall in first quarter profit before tax to $3.2 billion. Reported revenue decreased by 5.5% to $13.6 billion. The expected credit loss (ECL) jumped by $2.4 billion to $3 billion. The Asia-focused bank cited the pandemic, weaker oil prices, as well as corporate exposure to Singapore for the huge increase in ECL. A common theme of the latest reporting season is that banks are preparing themselves for a surge in bad debts. The closely watched net interest margin rate dipped to 1.54%, from 1.56% in the fourth quarter, but that metric is expected to fall further in the months ahead because of the various rate cuts that were announced in the past few months. The bank revealed a big restructuring plan in February, whereby it would lower its headcount by 35,000. Today, HSBC will now put those plans on hold on account of the health emergency. In the three month period the return on tangible equity dropped to 4.2% from 5.2%, and keep in mind, the bank was planning on achieving 10-12% by 2022.
It was reported that Lufthansa have secured as rescue package from the German government to the tune of €9 billion, hence why the stock is higher. There is talk the finer details of the package will be hammered out today.
Some normality has returned to the UK supermarket sector as people are no longer panic buying. Kantar said that grocery sales in the four weeks until 19 April grew by 5.5%. The March reading was a record as it topped 20%, but that was because of extraordinary circumstances, to say the least. In the 12 week period until 19 April, Sainsbury’s saw an 8.4% rise in sales – it was the strongest of the ‘big four’ supermarkets. Tesco, Morrisons and Asda, posted increases of 7.2%, 4.3% and 3.5% respectively. As per usual the deep discounters came out on top. Aldi registered an 8.8% jump in sales. While Lidl saw sales rise by 14.8%.
Marks & Spencer’s board of directors are not anticipating to pay a dividend. The move would save the company £210 million.
US
The S&P 500 was higher in early trading, but the drop in tech stocks has pulled the index into the red. A number of US states have taken small steps to reopen their economies. In the grand scheme of things, the actions are tiny, but more importantly, they project a very positive message. Equity traders are very much aware that stocks are a lot cheaper now than they were in February, but they need to see that things are heading in the right direction before they buy into the market. The easing up of restrictions will be a slow process, but what has happened so far as helped sentiment. A number of big tech stocks will report their figures today, and that is on dealers’ minds too.
Caterpillar’s first quarter numbers were disappointing but the stock is marginally in the red. Revenue dropped by 21% to $10.6 billion, missing the $10.9 billion forecast. EPS came in at $1.60, which was a big fall from the $3.25 that was posted in the same period last year, and it undershot the $1.69 consensus estimate. The heavy machinery manufacturer said that 75% of its primary facilities were continuing to operate, which is encouraging, but the big question is, will there be much demand for their machines in the months ahead. The group will be withholding pay increases plus bonuses for many workers and all senior executives, as a way of cutting costs. Caterpillar did not offer a guidance,
Southwest Air posted a quarterly loss of $94 million – its first quarterly loss since 2011. The pandemic has had a crippling effect on the company. Last night it announced plans to raise $1.6 billion through an equity offering. It also wants to raise $1 billion via a debt issue. The group are desperately trying to raise cash to beef up their balance sheet. The airline will take delivery of fewer Boeing 737 Max aircrafts than it originally agreed upon, as the remainder of the order will be delayed.
In light of the current situation Boeing are likely to suffer further order delays or cancellations in the coming months. The aircraft manufacturer will recommence production of its 787 Dreamliner aircraft at its South Carolina operation from 4 May.
Alphabet will post their first quarter results after the close of trading tonight. The company owns Google, and advertising revenue is by far the biggest money spinner for the group. A report circulated last week that Google might slash its marketing budget. In recent years, Google has attracted a huge range of companies to advertise on its site, but seeing as many industries have been effectively stopped in their tracks, that could lead to a drop off in advertising revenue for the tech giant. In February, Alphabet revealed mixed fourth quarter results, as EPS comfortably topped forecasts, but revenue narrowly fell short of the consensus estimate. Some traders were a little concerned that revenue growth was tapering off, so one would imagine those concerns have now grown.
AMD will also post their first quarter figures tonight. The CMC ‘Big Tech’ share basket is down 1.2% on the day.
FX
The broad decline in the US dollar has lifted GBP/USD and EUR/USD. The CMC EUR index and the CMC GBP index are flat and slightly lower respectively, so the euro and the pound are fairly muted themselves. Volatility in the foreign exchange market has been low today.
Last week the greenback was attracting safe haven flows but that is now being reversed. There was further evidence of pain in the UK retail sector, as the CBI realised sales report for April slumped to -55, its lowest reading since December 2008. The National Institute of Economic and Social Research (NIESR) predicts the UK economy will contract by 7.5% in 2020, but post 6.8% growth in 2021.
Commodities
The oil market has once again seen violent moves. This morning, S&P announced that its major commodity index, the S&P GSCI, would be swapping out WTI June contracts for longer dated contracts, and that was cited as a possible reason for the turnaround in WTI – which is in positive territory, and Brent crude is showing decent gains. Fund managers that have exposure to WTI are fearful the June contract will go into meltdown at expiry – like how the May contract did – so there is a lot of repositioning of portfolios going at the moment.
Gold is in the red again as traders favour stocks to assets that are deemed to be lower risk. The metal typically doesn’t perform well in a risk on environment, and that is what we are seeing today. The decline in the commodity hasn’t been too big, but then again, the weakness in the greenback is probably cushioning the fall.
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