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Stocks rise as US transition concerns ease

Positive vaccine news is almost becoming a habitual weekly event, which is perhaps why yesterday’s European session fizzled out a little after an initally good start.

Despite the lacklustre start to the week’s trading, sentiment is certainly becoming much less pessimistic, with Japanese stocks taking another leg higher to fresh multi-year highs above 26,000, helping stocks here in Europe off to another positive start, in the hope that they can make these gains stick.

This renewed push appears to have come about as a result of events in the US, where Joe Biden appears to be starting the slow transition process to a new US administration next year, as President Trump somewhat begrudgingly makes life easier by slowly removing the various obstacles to a smooth process. Reports that Joe Biden has asked former Fed chair Janet Yellen to be the next US treasury secretary have also boosted sentiment, raising the hope of a much more consensual approach between the central bank and US administration over the next four years.

It has also raised the prospect that Lael Brainard, who was in line to fill the US Treasury Secretary role, and who currently sits on the Fed board, could well become the next Fed chair when current incumbent Jerome Powell’s term comes up for renewal in February 2022, in what some investors have construed as the ultimate golden ticket for markets.

The usual suspects appear to be leading the gainers on the back of the more optimistic outlook, with IAG and Rolls-Royce continuing their almost symbiotic moves up and down as vaccine news ebbs and flows, amid talk that some quarantine rules could get eased to six days from 15 December if passengers pay for a coronavirus test that comes back negative. This has been welcomed by the travel sector as being long overdue, sending the likes of Air France, Lufthansa and easyJet higher as well.

Talk of a health passport from IATA also appears to be gaining traction, as a possible solution to unlocking the various border restrictions caused by the pandemic, particularly on long-haul flights. This would work in conjunction with a vaccine programme, allowing passengers to avoid extended quarantine times if they have had a vaccine which is then cross-checked on their passport. This seems highly ambitious and not a little dystopian, and is likely to present a number of significant civil liberty obstacles, and could undergo some significant pushback, but it does appear to speak to a direction of travel in the context of a return to getting the aviation sector back in the air (pun intended).

Higher oil prices and a more optimistic outlook are also helping the likes of BP and Royal Dutch Shell. On the company’s front, the full-year numbers from Compass Group showed revenues fall sharply over the year, after the shock of the various lockdowns caused Q3 revenues to fall by 44%, and Q4 revenues to fall by 34.1%, with sports and leisure taking the biggest hit due to the various closures of sports and leisure venues. The reopening of schools has helped the picture improve, particularly in Q4, however revenues are still below where they were a year ago, apart from in healthcare and seniors. Over the year revenues fell 18.8% to £20.2bn, with operating profits plunging nearly 70% to £561m. The recovery seen in Q4 appears to have helped boost the Compass share price in early trade.

It’s been a decent year for online retailers and AO World is no exception, with the pandemic prompting an explosion in profits and revenues for this online electrical goods retailer, as people spent money on new washing machines, fridges, cookers and TVs. The AO World share price has already seen big gains this year, up over 300% year-to-date as revenues jumped over 53% to £717m, while profit-before-tax rose to £18.3m, up from a loss of £5.9m a year ago. These improvements were driven not only by its UK business, but also by its business in Germany, which saw revenues rise by 85% to over £100m. Despite the decent numbers, AO World's share price has slipped back sharply in early trading, perhaps not surprising given how far the share price has come. The lack of guidance about the outlook probably isn’t helping either, and is a little surprising. After such a decent performance the least investors can expect is some sort of statement about the next six months.

Pennon Group, owners of South West Water have reported H1 pre-tax profits of £61.9m, a fall of 48% from last year’s £119.4m. In the summer, the company completed the sale of its Viridor waste operation for £3.7bn, generating an overall profit of £1.7bn. The company went on to outline its plans for the next five years in the context of investment in its water business, through its WaterCare+ programme, as well as looking to reinvest the proceeds of the Viridor sale in other opportunities in the UK water sector.

The US dollar has come under pressure again on the back of the more positive outlook for risk, as well as the prospect that a new US administration could be less US dollar friendly, in terms of monetary and fiscal policy. US markets look set to carry on from where they left off last night, opening higher with the S&P 500 set to have another look above the 3,600 level.  

On the data front, the latest US consumer confidence numbers could be affected by the recent surge in virus cases ahead of this week’s Thanksgiving holiday. Expectations are for a fairly resilient reading of 101.5, however they could be impacted by the recent restrictions that have been imposed in places like California, New York and Chicago, with the recent announcement by Chicago Mayor Lori Lightfoot who urged people not to travel over the Thanksgiving holiday period.

In the US we get the latest Q3 numbers from Best Buy, which like a lot of the bigger US retailers has managed to ride out some of the worst of the coronavirus shutdowns, with Best Buy's share price also at record highs earlier this month. Best Buy saw revenues slip back in Q1 as a result of the store shutdowns, however a 154.4% rise in online sales helped offset a lot of the slowdown in revenues. In Q2 online sales saw a 242% rise from a year ago, while same-store sales also rebounded 5.8% as lockdown restrictions were lifted. Revenues came in at $9.91bn in the second quarter, while profits blew away expectation, coming in at $1.71 a share. The bulk of sales came from the sales of electrical items, from computers to kitchen items, though Q3 sales and revenues could well struggle to meet the levels we saw in Q2. As we look ahead to the Q3 numbers we can probably assume that costs are likely to be higher due to staff safeguarding measures and the like, with profits expected to come in at $1.64 a share.


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