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Market Outlook

The Week Ahead: ECB meeting; easyJet, Netflix, Royal Mail results

Read our pick of the top stories to look out for this week (19-23 July), and view our key company earnings schedule.

In this week's video, Michael reviews the latest action and discusses inflation concerns, and looks ahead to the European Central Bank rate decision, UK, Germany and France manufacturing and services PMI data, plus results from easyJet, Royal Mail, Netflix and Twitter.

EasyJet Q3 results

TUE 20: When easyJet reported a first-half loss of £701m in May, the company said the outlook for Q3 wasn’t much better, with the airline only expected to fly around 15% of its 2019 capacity. It was hoped this would increase from June onwards as the next stage of lockdown restrictions were expected to be eased. The fact is that didn’t happen, and that even if we get some semblance of a relaxation in July, it would still mean three successive quarters of capacity below 20%, it’s unlikely the upcoming Q4 will be any better as we head into winter, when the weather turns colder.

On the plus side, there has been some talk that fully-vaccinated people might not have to quarantine after travelling, but that still needs to be set against concerns that rising cases in Europe might prompt some tightening of restrictions at the other end. For now, the airline still has unrestricted access to £2.9bn of liquidity, having raised over £5.5bn since the start of the pandemic, however the sector remains a long way from any semblance of a return to normal, as shown by easyJet's share price declines in the past week.

Netflix Q2 results

Tue 20: When Netflix reported a big miss on Q1 user growth in April, shares fell back sharply and while they have pared back some of those losses, there is concern that the explosive growth of the past 12 months is unlikely to be replicated. Despite the disappointment of a slowdown in user growth, revenue came in much better than expected, at $7.16bn, while profit of $3.75 a share was well above expectations of $2.98.

Expectations for user growth in Q1 were always likely to be a hostage to fortune, given that they were set at a rather lofty 6m, and with lockdowns set to be eased and the summer months usually a time when people go outdoors, there was always a risk that we might see a miss, which is precisely what we saw, with 3.98m new users. While that was disappointing, the real kicker came with user growth estimates for Q2 at 1m, well below estimates of 4.4m, and sharply down from last year’s 10m, which were pumped up by the first Covid-19 lockdown.

Estimates for Q2 revenue are still expected to be healthy at $7.3bn, and while the next two quarters are likely to see slightly slower subscriber growth, the second half is likely to pick up as new series of Stranger Things, Lost in Space and The Witcher get rolled out. Operating margins rose to 20%, while the company said it still expects to come in cashflow positive for the full year. Netflix faces a huge number of challengers in the months ahead, from Disney+, Apple TV+, the Warner Media/Discovery merger, and Amazon paying $9bn for the MGM back catalogue for its Prime offering, but it still remains very much the market leader internationally, with nearly 210m subscribers.  

Royal Mail Q1 results

WED 21: Last year proved to be a solid one for Royal Mail, as full-year profit came in at £726m, in line with previous guidance at the end of March, when management also announced a one-off dividend of 10p a share. In more good news for shareholders, management also outlined a new progressive dividend policy, with the dividend for 2021-22 set at 20p per share. This led to Royal Mail’s share price pushing back up to the 600p level and three-year highs.

While the pandemic has presented the wider business with several challenges, the parcels business has performed very well, with revenue up 38.7%, although letter volumes were a drag, declining 12.5%. Higher operating costs have been a factor, with a rise of 9.2%, however by and large the business has adapted.
The new trading year also got off to a positive start in April as revenue climbed 24.1%, with logistics subsidiary GLS showing a 22.3% rise, although Royal Mail parcel volumes were down 2%. The Q1 update is expected to show May volumes slowing, with more people venturing out as the economy reopens and consumers shop from home less.

ECB rate meeting

THU 22: Until recently, there have been low expectations around this meeting, after the last meeting saw the European Central Bank upgrade its GDP forecasts for 2021, from 4% to 4.6%. In recent months there has been some underlying grumbling among Northern European countries about the pace of asset purchases, and an insistence they must end by March 2022. With virus cases rising again and some parts of the European economy uniquely vulnerable to rising infection rates, it seems highly unlikely that the ECB will ever be in a position to withdraw support at a time when economic activity remains far from returning to normal.

We’ve already heard that the ECB will be changing its inflation mandate to try and give itself more flexibility over monetary policy. Its previous mandate was to keep inflation at or below 2% over the medium term. Its new mandate gives the central bank a more flexible and dovish inflation target of 2%, while also adopting a 2% asymmetric inflation target over the medium term. This change will allow the central bank to tolerate temporary inflation overshoots to its policy target. While an entirely sensible measure on the face of it, this can only be described as a change of style over substance, given the ECB’s complete lack of success in meeting its previous mandate.

We should hear more about how the ECB expects to achieve this when Christine Lagarde gives her press conference, along with details on an upcoming policy shift on the forward guidance on the PEPP programme, which she talked about earlier this month. Currently it sits at €1.85tn and is due to run to at least March 2022. This date is likely to get pushed out, given her comments that emergency stimulus will not be wound down any time soon, however there could be considerable resistance to this from some governing council members, which could mean that any decision is unlikely to be unanimous. 

American Airlines Q2 results

THU 22: American Airlines (AA) got off to a poor start to the year with Q1 revenue falling 53% year-on-year to $4bn, and posting a loss of $2.7bn. The company did manage to raise $10bn through a debt offering backed by its AAdvantage air miles programme, and used the proceeds to repay the US Treasury loan from last year's Federal bailout. At the end of Q1, management said it had $17.3bn of total liquidity, which it expected to see increase to $19.5bn by the end of Q2.

The airline expects Q2 capacity to be down by 25% from 2019 levels, and revenue to be 40% lower. Last week AA surprised the market by saying it expects revenue to come in ahead of forecasts, and could post a slight pre-tax profit for the quarter. The improvement in domestic air travel appears to be behind this, with AA saying it flew 44m passengers in Q2, an 82% increase from Q1, though still below the levels in 2019. Revenue for Q2 is expected to come in 37.5% below 2019 levels instead of the previously guided 40%, and that it expects to turn cashflow positive for the first time since the start of the pandemic.

Twitter Q2 results

THU 22:  Having posted a loss in 2020, management were much more bullish heading into 2021, expressing optimism that it would almost double revenue in the next two years to $7.5bn. This optimism got a wake-up call in Q1, when the results for revenue and monetisable active user growth missed their mark. The company may have lofty ambitions, but there appears to be some scepticism that they will be able to meet them, after Q1 revenue fell to just over $1bn, from $1.29bn in Q4.

To justify its current valuation, the company needs to return to profit and significantly improve its ability to generate revenue of at least $2bn on a quarterly basis. Based on current consensus, it’s struggling to generate half that amount, with expectations for Q2 expected to be about $1.06bn. Twitter has been experimenting with new products like Fleets, an Instagram stories-like feature, and Twitter Spaces, however these are struggling to catch on. In the case of Fleets, Twitter appears to be have taken the decision to remove it. It turns out Fleets was rather fleeting. Unless Twitter can harness the holy grail of monetising as well as growing its user base, investors should be prepared for more disappointment. Profit is expected to come in at $0.07 a share.

Vodafone Q1 results

Fri 23: Vodafone’s  share price has  lost ground since it posted underwhelming full-year numbers in May. Revenue for the year declined £2.6% to €43.8bn, with the lift to revenue from its Liberty Global acquisition helping to offset a weaker market for handset sales and roaming revenue. The proceeds of the Vantage Towers IPO helped to reduce the company’s debt levels to €40.5bn, as full-year EBITDA marginally missed the lower end of expectations at €14.4bn. Organic service revenue did beat estimates, rising 0.8%, above expectations of 0.4%, helping the company to return to a profit of €536m, however free cashflow fell 11.9% to €5bn.

Both these measures are expected to improve in 2022, with EBITDA expected to rise 4% to €15bn-15.4bn, while free cashflow is expected to rise to €5.2bn. It’s clear the pandemic has affected mobile revenue, with UK revenue down 5.1% last year, while its European business has also suffered due to lower roaming charges, despite increasing its mobile customer base to 65.4m. Vodafone still has much to do as it tries to navigate a reduction in its debt pile, while at the same time investing in technology to improve its 5G network.

UK retail sales (June)

FRI 23: After two strong months of retail sales growth in March and April, at 5.1% and 9.2%, retail sales in May slid sharply by 1.4%, against an expectation of a 1.5% rise. This was unexpected given that a corresponding BRC retail survey showed a decent outperformance for the same month, with May sales increasing at their best rate since the pandemic struck the UK. Total sales for May increased 10% compared with 2019, and by more than the same number in April on a two-year basis, with clothing retailers the biggest beneficiaries of a return to the high street.

It was speculated that the bad weather at the beginning of May could have impacted demand, while forward bookings for hotel accommodation in the leadup to the May reopening weren’t as strong as originally thought. As we look towards the June data, there is concern that the postponement in relaxing restrictions could have knocked confidence, however the latest BRC retail survey for June showed that was far from being the case. According to the BRC, UK retail had its best quarter on record with the spending in June rising by 13.1% against a decline of 1.9% in June 2019. Food and non-food sales were strong thanks to Euro 2020 and other sporting events prompting additional spending. With more people being encouraged to holiday at home, the delay in lifting travel restrictions could also act as a boost as more people book a domestic break instead. Expectations are for a rise of 0.4%.

UK flash PMIs (July)

FRI 23: While we’ve seen a continued outperformance in purchasing manager indices (PMI) numbers over the last few months, there appears to be increasing divergence between what this data is telling us and the official ONS data. While manufacturing and construction surveys have come in above the 60 level for the last three months, the official ONS numbers have shown much weaker economic activity. The same divergence appears to be manifested in the services data, which has remained strong, while retail sales showed an unexpected decline in June.

Friday’s flash PMI data for July is expected to show solid readings once again, however given recent trends we do have to start treating the PMI figuers with slightly more caution, given that they also exclude some important parts of the economy that are continuing to struggle. One trend to keep a close eye on is the higher cost prices being reported by businesses, as they struggle to source the necessary materials for their goods and services.

France & Germany flash PMIs (July)

FRI 23: With most of Europe slowly easing restrictions, economic activity has  increased over the last few months, although services activity continues to lag behind a touch, with manufacturing outperforming. German manufacturing in particular has performed well, posting levels above 60 every month this year, apart from January. Services activity has been much more of a slow burn, although in June activity hit a three-year high. In France services activity also hit a three-year high as lockdown restrictions were eased, while manufacturing remain steady at 59. The biggest concern now is that a slowdown in the global economy and the recent easing of monetary policy by China means it could be as good as it gets for PMIs as we head into Q3, given Germany’s reliance on trade with China.

Index dividend schedule

Dividend payments from an index's constituent shares can affect your trading account. See this week's index dividend schedule

Selected company results

Monday 19 July Results
IBM (US) Q2
SThree (UK) Half-year
Tuesday 20 July Results
EasyJet (UK) Q3
Halliburton (US) Q2
Manpower (US) Q2
Netflix (US) Q2
Wednesday 21 July Results
Baker Hughes (US) Q2
Coca-Cola (US) Q2
Harley-Davidson (US) Q2
Nasdaq Inc (US) Q2
Royal Mail (UK) Q1
Texas Instruments (US) Q2
Verizon Communications (US) Q2
Thursday 22 July Results
American Airlines (US) Q2
AT&T (US) Q2
Capital One (US) Q2
Centrica (UK) Half-year
Dow Inc (US) Q2
DR Horton (US) Q3
Intel (US) Q2
Moneysupermarket.com (UK) Half-year
Mulberry (UK) Full-year
Snap-on (US) Q2
Twitter (US) Q2
Unilever (UK) Half-year
Union Pacific (US) Q2
Verisign (US) Q2
Friday 22 July Results
American Express (US) Q2
Beazley (UK) Half-year
Honeywell International (US) Q2
Kimberley-Clark (US) Q2
Vodafone (UK) Q1

Company announcements are subject to change. All the events listed above were correct at the time of writing.


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