News

Stocks tumble as brutal economic forecasts sink in, Costain flies

Equity markets in Europe are firmly in the red as the warning from the IMF yesterday has finally sunk in.

Europe

The group anticipates the world economy could contract by 3% this year. The update was in stark contrast to the forecast it issued three months ago, when it projected worldwide growth of 3.3%. The eurozone was in a relatively weak position before the pandemic, and according to the IMF its outlook is particularly bleak, as the currency area might experience a contraction of 7.5% this year.

Yesterday, European equity markets reopened after the Easter break. It wasn’t an exciting trading session despite the fact that Spain and Italy had loosened some of their restrictions regarding their lockdowns. Looking back at it, the absence of a sharp move higher on the rolling back of some of the restrictions, highlighted the not-so-hot sentiment.

Much of the ground that European equities have made since mid-March was fuelled by rescue schemes, and more recently, the levelling-off of the rate of infections, but traders are facing up the prospect of a painful economic downturn.      

Ocado continues to do well as the online grocery store has been very popular in recent weeks due to the social-distancing policy. With the lockdown likely to be extended, Ocado are likely to remain high on traders shopping list.

Costain shares have surged today as the engineering group was given the green light for a joint venture project on HS2, the contact is worth £3.3 billion.

House builders are still suffering from the OBR’s awful forecast yesterday. The body predicts the British construction industry could contract by 70% in the second-quarter. Vistry has fallen the most today, it is down over 8%.   

US

The mood on Wall Street is negative as traders digest the grim economic reports. In March, retail sales tumbled by 8.7%, and the New York Fed manufacturing index for April dropped to -78.2, its worst reading on record. With data like this, one can see why the IMF feel the world is in for a horrendous recession.    

Once upon a time, traders were fixated on how much revenue banks were deriving from their trading units, but in this reporting season, the provisions for bad debts from loan defaults are in focus. Citigroup upped its loan loss reserve by $4.9 billion. Earnings were dented because of the surge in the provision. EPS were $1.05, which was a big fall from the $1.87 registered one year ago. The bank’s bond and equity trading departments both posted 39% increases in revenue. Bank of America set aside $3.6 billion for bad loans. The firm is heavily exposed to the retail banking sector, and the division saw profit slump by 45%.  

The airline industry is in focus today as it was bailed out by Washington DC to the tune of $25 billion. The move is a part of the $2.2 trillion rescue scheme was that revealed last month. The Trump administration provided assistance to the blighted sector as the industry has been one of the worst impacted by the health crisis. The funds will be solely used by airlines to pay their employees. There is a separate lending scheme, which airlines can avail of too – credit can be hard to come by these days, so the government are providing help. It is was reported that American Airlines, Delta Air, and South West Air accounted for more than half of the $25 billion aid programme.

It’s not all doom and gloom out there, as Netflix shares hit a record-high. The government imposed lockdowns are clearly helping the company. In a strange way, the streaming service has a captive audience.

 

FX

After being in a down trend for over one week, the US dollar has rebounded, as short covering and bargain hunting have lifted the currency. The upward move in the greenback has hurt EUR/USD and GBP/USD. It was a quiet day in terms of economic reports from Europe. The final reading of French CPI for March was 0.8%, a slight improvement on the flash report, which was 0.7%. Italian CPI for last month was 0.1% - which highlights how weak demand is in the country. The greenback is higher today despite the dreadful economic indicators from the country, but seeing as the US dollar index fell to its lowest level in over two weeks yesterday, it would appear that a lot of bad news was already baked into the currency.

The CMC AUD index is down over 1.4% as the declines in commodities has hammered the Australian dollar. The currency falls into the risk-on category, and seeing are traders are not in the mood to take on risk today, it is under enormous pressure. On the other side of the coin, the yen is in demand – a clear sign of risk-off sentiment.  

The Bank of Canada kept rates on hold at 0.25% meeting economists’ forecasts. The central bank confirmed it will keep purchasing C$5 billion worth of government bonds every week, in addition to that, a provincial bond buying scheme has been announced too – it will be up to C$50 billion.  USD/CAD is up 1.5% on the day, the weak oil market has hurt the Canadian dollar.

Commodities

Gold is slightly offside today due to the move higher in the US dollar. The two markets typically have an inverse relationship and that is playing out today. Gold is traded in US dollars so the more expensive the greenback becomes, the more costly gold becomes too, hence its fall. Gold is in the red today, but it is worth noting it hit a level last seen in 2012 yesterday, so a pullback isn’t a huge shock.     

Oil is enduring another sizeable fall as demand fears persist. The International Energy

Agency cautioned there is no feasible production cut agreement available that will offset the fall in demand. Earlier in the session, WTI fell to its lowest mark since 2002, but it is off the lows of the day. The latest EIA report showed that US stockpiles were 19.24 million barrels, topping forecasts. The update underlines the weak demand.  

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