Equity markets in Europe are deep in the red as dealers are worried about the economic impact of the health crisis.
Yesterday, the Fed chief, Jerome Powell, cautioned that downside risks are significant, and the economic pain might remain for a prolonged period. The warning from the central banker came at a time when there are growing concerns about the jump in new infection rates as a result of countries reopening parts of their economies. Governments will need to strike a balance between loosening restrictions, and keeping the health crisis in check. There is a feeling the coronavirus will be hanging over the markets for many months to come.
3i shares are bucking the wider negative trend as the company maintained its total dividend of 35p. The private equity group said they had a solid performance for the first 11 months of the financial year, but then the Covid-19 crisis struck. The group has a varied range of investments, and the holdings in e-commerce and personal care products have performed well, but the travel, retail and auto businesses have been hit hard by the pandemic. Total returns to shareholders were £253 million, which was a huge fall from the £1.25 billion returned last year. The company is in good shape in terms liquidity and net debt. In light of the huge uncertainty caused by the health crisis and the sharp drop in returns to shareholders, is it prudent to be maintaining current dividend policy?
Hargreaves Lansdown issued a bullish trading statement. In the four month period, net new business increased by £4 billion. In addition to that, net new clients increased by 94,000, so now the active client base stands at 1.36 million. On a year-to-date basis, the total revenue increased by 13% to £448.1 million – which was helped by record dealing volumes. On account on the strong performance, the company will be keeping its dividend policy on hold. The stock is now lower after being one of the best performers on the FTSE 100 day.
Stagecoach, Go-Ahead Group, FirstGroup and National Express shares are all suffering as the government has warned against using public transport. Some people have been encouraged to return to work, depending on what industries they are in, but Westminster is advising people to drive, cycle or walk to work in an effort to try and keep the health crisis under control, hence why transport stocks are in the red. To make matters worse, Citigroup have downgraded the companies in question, which has added to the large sell-off in their share prices.
On a similar note, airlines like IAG, easyJet and Ryanair are suffering too as the government has essentially warned people that going on holidays is a potential health risk. In addition to that, individuals who enter the UK will be required to self-isolate for two weeks, so flights are likely to be in low demand.
Persimmon confirmed they will reopen show homes and sales centres from tomorrow, but strict social distancing guidelines will be in place. The news echoes the update from Taylor Wimpey who stated yesterday they will recommence operations at their sales sites in the near-term. As of early May, Persimmon had construction activity at 65% of the pre-crisis level. The updates in the past 48 hours from the construction sector, will probably lead to other firms following suit in the next few weeks.
Marston’s shares are up on the day as the company confirmed it agreed an additional £70 million credit facility. On top of that, the pub group scrapped its dividend and senior management have agreed pay cuts. The belt tightening exercise has boost confidence in the company.
Stocks are in the red again as the warning from Mr Powell yesterday is still playing on traders’ minds. Dealers are scared the US economy will not experience a sharp contraction followed by a fast rebound. In light of the update from the Fed chief, there is now a feeling the economy might experience a slow and painful recovery. The latest jobless claims report came in at 2.98 million, which was an improvement on the 3.17 million from the last report.
Cisco shares are higher as the company posted positive third quarter numbers last night. EPS were 79 cents, which topped the 69 cents forecast. Revenue slipped by 8% to $11.98 billion, while the consensus estimate was $11.70 billion. In terms of a guidance for the fourth quarter, the firm predicts that EPS will be in the region of 72-74 cents, exceeding the 69 cents forecast. The group anticipates that revenue will dip by between 8.5% and 11.5%, but equity analysts were factoring in a 12% slide in revenue.
Airlines are still feeling the pain of the travel bans. The industry has been one of the hardest hit by the Covid-19 crisis, and fresh fears that US states that have reopened their economies might be in for a jump in new infections has hit sentiment. By the way things are shaping up, air travel is likely to be one the last sectors to see a meaningful resumption of business. United Continental, Delta Air, American Airlines and Southwest Air are all lower today.
GrubHub shares are down 6% as there are fears that Uber’s takeover bid for the company might fall apart. Uber shares are lower too.
A broad move higher in the US dollar index has hit GBP/USD and EUR/USD. The greenback seems to be acting as a safe haven currency. Yesterday, Jerome Powell, said the Fed is not considering negative rates, and that appears to be helping the US dollar. This morning, Andrew Bailey, the Bank of England governor, also made it clear the UK central bank is not considering negative rates.
The currency market has lacked the excitement of stock markets recently. AUD/USD is under pressure from the firmer greenback, and the disappointing Australian jobs data has hurt the Aussie too. The Australian employment change was nearly -600,000.
Gold is comfortably above the $1,700 mark thanks to the risk-off strategy of traders. The metal hit its highest level since late April as the bearish sentiment in stocks has prompted dealers to pour funds into gold as it is considered to be a lower risk asset. The bullish move is all the more impressive as the dollar is higher, which usually weighs on the commodity.
WTI and Brent crude oil are higher this afternoon, but it is worth noting the energy contracts are off the highs of the day. The oil market did well earlier in the session on the back of yesterday’s Energy Information Administration report, which showed that US oil stockpiles fell - the first weekly decline since January. The International Energy Agency predicts that demand for oil in 2020 will fall by 8.6 million barrels per day (bpd), but their previous forecast was a drop of 9.29 million bpd, so the revision helped the market.
CMC Markets is an execution-only service provider. The material (whether or not it states any opinions) is for general information purposes only, and does not take into account your personal circumstances or objectives. Nothing in this material is (or should be considered to be) financial, investment or other advice on which reliance should be placed. No opinion given in the material constitutes a recommendation by CMC Markets or the author that any particular investment, security, transaction or investment strategy is suitable for any specific person. The material has not been prepared in accordance with legal requirements designed to promote the independence of investment research. Although we are not specifically prevented from dealing before providing this material, we do not seek to take advantage of the material prior to its dissemination.