Market Outlook

The week ahead: ECB rate decision; Apple, Facebook, BP results

Watch our week ahead video preview, read our pick of the top stories to look out for this week (26-30 October), and view our key company earnings schedule.

Michael looks at a busy week for central banks, with the ECB and Bank of Japan in focus, as well as the latest discussions over US fiscal stimulus and Q3 GDP data from France, Germany and the EU. He also previews the latest numbers from BP, HSBC, Lloyds, NatWest, Apple and Amazon, and looks at the key technical levels on EUR/USD, GBP/USD, FTSE 100, DAX, S&P 500 as well as HSBC, BP, Lloyds and Apple.

BP Q3 results

Tuesday: Having announced almost $20bn in write-downs this year, BP finally succumbed to the inevitable. In August, the multinational cut its dividend from 10.5c to 5.25c a share as it outlined its new strategy to restructure the business, against a backdrop of slowing demand and a shift towards renewable energy. Investor reaction since new CEO Bernard Looney outlined these new plans has been less than enthusiastic, with the share price continuing to fall to levels last seen in 1995. While this is disappointing, turning around a company of BP's size and mindset was always going to be akin to turning around a supertanker. 

The reality was that doing nothing was not an option, as net debt approached the $50bn mark. The company has finally taken steps to reduce this in the form of disposals, selling its Alaska business, Hilcorp, for $5 6bn and its petrochemicals business to Ineos for $5bn. It also expects to complete the sale of its assets in the North Sea to Premier Oil by the end of this quarter, as well as completing the sale of its interest in the Trans-Alaska Pipeline. BP’s commitment to a tenfold increase in low carbon investment by 2030 sounds laudable, but it’s still small change when compared to how much BP spent in acquiring BHP’s shale assets in 2018, and the fact that this year’s capex budget is expected to be in the region of $12bn. Another problem facing the oil giant is a weak industry refining environment,, with Q2 the weakest in 15 years, suggesting that Q3 is unlikely to be much better. There were some bright spots in BP’s most recent trading update, namely a strong performance from its trading division which helped bring the Q2 loss down to $6.7bn, with the hope that this can be repeated in Q3.

HSBC Q3 results

Tuesday: When HSBC reported its first-half numbers in August, it’s shares hit an 11-year low in London trade, after reporting that it could see up to $13bn in loan losses over the course of the rest of the year. Since then, the shares have continued to slip back, as signs of a second wave and further central bank stimulus have weighed on the sector. The bank increased its provision for credit losses in H1 by $5.7bn to $6.9bn, largely as result of uncertainty over the economic outlook and Covid-19. The bank also set aside $1.2bn in respect of software intangibles, mainly in its European operation. The bank is undergoing a significant cost-cutting plan, with 4,000 jobs already removed in the first-half alone. Those numbers look likely to increase the pressure to speed up this process, with the bank planning to cut at least another 31,000 positions in the near future. 300 more job losses were announced earlier this month, after the bank said it would be undergoing a restructure of its UK commercial banking division.

The bank also cited concerns over the outlook in Hong Kong and the UK, due to geopolitical uncertainty, while pledging to review its dividend policy at the end of the financial year. Its Hong Kong problems are likely to be particularly acute, as it strives to navigate a tightrope between the US and Chinese governments, regardless of who is elected as the next US president. There could come a point when it has to decide whether to pivot even more towards Asia, at the expense of its US and UK businesses, if tensions between the US and China continue to persist. The shares did receive a boost at the end of last month when one of its largest shareholders, Ping An, raised its stake from 7.95% to 8%, pulling the shares off their 25-year London and Hong Kong trading lows.   

Whitbread Q3 results

Tuesday: Of all the sectors that have borne the brunt of coronavirus disruption, the hotel sector has been at the forefront. A fairly decent set of full-year numbers in May was almost incidental as the pandemic blew a huge hole in Whitbread's expectations for this year. All but 39 of its hotels in the UK remaining closed, with the assumption that they would have fairly low occupancy until September. While the summer months have seen numbers pick up, the slowdown in bookings and the upcoming end of furlough led to management warning that 6,000 jobs could go last month, if the crisis continues, amounting to 18% of the workforce.

Demand for rooms was strong in seaside and holiday destinations as consumers took advantage of staycations, with 80% occupancy rates, however city centre demand remained weak. In September, management said overall occupancy rates were averaging 51% in August, while restaurant performance was boosted by the 'Eat Out to Help Out' scheme which helped boost total sales to 38.5% below last year’s levels. In Germany there was also positive news, with hotels there reopening on 11 May, and the summer recovery matching the patterns seen in the UK. This week’s update is likely to show that Premier Inn performed well in Q3, giving itself some breathing space, while it faces the prospect of a weaker Q4, as tightening lockdown restrictions impact both its city centre and regional outlets.

Amazon Q3 results

Thursday: When Amazon reported in Q2, profit had risen sharply as people shopped online through lockdown. These increased sales outstripped rising costs as a result of safeguarding measures for its staff. These costs came in at a staggering $4bn, as the company hired 175,000 new staff, as it expanded its grocery delivery capability by 160%. Management expects to spend another $2bn in Q3, with sales expected to come in between $87bn and $93bn. Amazon’s web services division also showed decent gains in Q2, with operating income of $3.4bn, up 60% on the year. However, revenue growth slowed, as the cloud-computing sector saw more and more new players come to the fore, with Snowflake one of many smaller companies playing in Amazon’s sandbox.

Apple Q4 results

Thursday: When Apple reported in Q3, there was some expectation that it would be a weaker quarter given that consumers tend to hold off purchases in the second half of the year in expectation of the announcement of new product launches. The pandemic has also presented Apple with a series of challenges, which it has been able to overcome with the launch of new cheaper iPhones like the SE, its cheapest ever handset at the beginning of Q3, which appears to have prompted some switchers from Android, and boosted sales in May and June, which in turn saw sales and revenue increase. iPhone sales rose of 1.6% over the year, with revenue rising to $26.4bn, while the sale of iPads and Mac computers also grew at a decent rate, largely as a result of the increase in working from home. 

Services revenue was a little disappointing, slipping back from Q2 to $13.1bn, though it was still higher than the same quarter last year. It’s still a little disappointing when you consider that Apple TV+ is part of that revenue stream, when compared to how Amazon Prime Video and Netflix have done. The recent stock split doesn’t appear to have done it any harm; if anything it has made Apple shares more affordable to a wider retail audience. In September, the company also launched a raft of new upgrades including a new iPad, and Apple One subscription bundle in what looks like an attempt to take on Amazon Prime, and a new Apple Watch 6 with a fitness bundle. None of these new products will be reflected in Thursday’s numbers, which means investors will be looking at whether management offer any guidance as to what to expect in terms of unit sales in the lead-up to Thanksgiving and Christmas.          

Bank of Japan rate decision 

Thursday: The most recent Japanese GDP numbers showed that the Japanese economy contracted 7.9% in Q2, with household spending making the largest part of that contraction. Since then the latest manufacturing and services PMI numbers in Q3 have remained consistently in contraction territory at around 46. This does not speak to a resilient economy, with domestic demand remaining stubbornly weak. Having spent most of the last 30 years keeping interest rates on the floor, and buying anything that isn’t nailed down, the Japanese central bank has also struggled to fulfil its mandate in pushing inflation up to 2%. The Bank of Japan’s latest policy, a $1trn loan programme straight out of the US Federal Reserve playbook, is the latest attempt by a central bank to help struggling firms over the coronavirus disruption hump. No changes in policy are expected, with the bank's latest loan programme set to last until March next year, and the economic recovery in Japan looking a lot weaker than elsewhere across the globe.

ECB rate decision 

Thursday: When the Eropean Central Bank expanded the size of its pandemic emergency asset purchase programme from €750bn to €1.35trn, and extended it into the middle of next year, there was probably an expectation that any recovery in Q3 would extend into the end of the year. While we’ve seen some evidence of an economic bounceback from the lockdowns in March and April, there is increasing evidence that the recovery has faltered, while headline inflation has slipped into deflationary territory. With services PMIs across Europe all back in contraction territory, the ECB has gone to great lengths to insist that its monetary toolbox still has plenty of ammunition to deal with the prospect of a double-dip recession. Sadly, the reality is somewhat different, and in the absence of an imminent fiscal response from the EU due to a lack of consensus, the ECB remains the only game in town. However, its response is being constrained by splits on the governing council, with a number of members pushing back against further stimulus in the short term. Once again, the ECB will come under pressure to articulate a new response to what is likely to be further economic weakness in Q4. 

Facebook Q3 results

Thursday: The coronavirus pandemic made little impact on Facebook’s ability to make money. In Q2, the company generated $18.7bn, up from $16.9bn, with profit nearly doubling to $5.18bn, despite rising concerns that it has a disproportionate influence on what its users can see, and what they say on its platforms. Average monthly users rose to 2.7bn up from 2.6bn in Q1. Facebook was more circumspect about its Q3 guidance, which it said would only show revenue growth of around 10%. Facebook is already under pressure from ad boycotts as well as how it deals with so-called hate speech on its various platforms. The bigger concern as we head towards the latest earnings number, is that expectations around Facebook’s user growth, as well as its underlying revenue could be too high, given that Thursday’s Q3 numbers will include the period where businesses came under pressure to boycott the firm. Profit is expected to come in at $1.91 a share.

Lloyds Banking Group & NatWest Group Q3 results

Thursday (Lloyds) & Friday (Natwest): Over the last few years, UK banks' share prices have struggled due to concerns over Brexit, however it has been the coronavirus outbreak and its long-term impact on UK consumers that has helped drive share prices to new multi-year lows. Concerns over shrinking margins and recent talk about the prospect of negative rates hasn’t helped either.

While UK banks are in better shape than their European counterparts, UK policymakers seem intent in making any recovery more difficult than it needs to be. From the backlash against so-called "casino banking” and the prospect of rock bottom and possibly negative interest rates, less diversified UK banks have struggled in an extremely competitive UK market. The only reassurance would appear to be that the UK government is willing to backstop some of the new lending that the banks need to do to keep the UK economy on life support. Unfortunately, that’s unlikely to address the real problem, which is expected to be one of widespread loan-loss provisions as consumers default on their existing debt obligations. For now, the UK government furlough scheme is helping to cushion the falls in disposable income, however the thousands of job losses that have been announced in the last few weeks are likely to create a trickledown effect of loan restructurings as well as possible losses. In Q2, Lloyds pushed up the estimate of total loan losses for the year to £5.5bn, after the bank set aside another £2.4bn in its statutory first-half loss of £602m, with £676m of that coming in Q2. Net interest margin for the quarter also fell sharply, from 2.79% to 2 4% in Q2, as lower interest rates ate into the bank's ability to generate income. This is unlikely to improve with the Bank of England seemingly intent on trying to implement a destructive negative rate policy. 

NatWest Group’s numbers in Q2 painted a similar picture. Having posted impairments of £801m in Q1, and an attributable profit of £288m, the bank posted Q2 impairments of over £2bn, well above expectations of £932m. The bank said it expects full-year impairments of between £3.5bn and £4.5bn. Natwest posted a first-half pre-tax loss of £770m, and on most comparatives the numbers don’t look great. Net interest margin fell to 1.67%, while in Q2 income across retail and the commercial bank fell by £176m, reflecting the slide in UK bond yields and the flattening of the yield curve. Weaker consumer spending and lower business activity didn’t help, though this isn’t too surprising given the lockdown of the UK economy during the period.

UK mortgage approvals & net consumer credit (September)

Thursday: After a sharp pause before and after lockdown, when UK consumers repaid almost £16bn between March and June, lending has started to pick up modestly in Q3, with £1.4bn of new credit in July and August. This speaks to a weak rebound and overriding caution on the part of UK consumers on taking on new liabilities. Mortgage approvals on the other hand have picked up, helped to some extent by the new stamp duty rules, as well customers remortgaging to take advantage of new lower fixed rates, sending them to their best levels since October 2007 in August, to 84,700. This appears to be a trend that could continue given the resilience in recent house price data.        

France, Germany & EU Q3 GDP

Friday: The latest France, Germany and EU Q3 GDP data is likely to point to a significant economic rebound in the summer months, however this is already likely to be old news. This is due to the slow decline in various services purchasing manager index (PMI) numbers that started in late summer, particularly in August and September, which showed that economic activity was already starting to deteriorate. Expectations are for French Q3 GDP to recover by 14.2%, after a 13.8% contraction in Q2, while Germany is set to recover by 7.5%, from the 9.7% decline in Q2. EU GDP is also set to rebound 9%, from the -11.8% decline in Q2.

US personal spending (September)

Friday: The strong rebound in retail sales since the US came out of lockdown has been surprising to say the least. There’s been a V-shaped recovery when it comes to retail spending, while consumer confidence also rebounded strongly in September. This has come about despite a rise in uncertainty ahead of next month’s presidential election, and the lapsing of the $600 a week payment that was paid to US households up to the end of July. Personal spending has also been strong, rising for four months in succession with the prospect we could see another month in positive territory.

Index dividend schedule

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

Selected UK & US company announcements

Monday 26 October Results
Hasbro (US) Q3
Independent Bank Group (US) Q3
Twilio (US) Q3
Tuesday 27 October Results
Bloomsbury (UK) Half-year
BP (UK) Q3
Caterpillar (US) Q3
Harley-Davidson (US) Q3
HSBC (UK) Q3
Microsoft (US) Q1
Pfizer (US) Q3
Shutterstock (US) Q3
Whitbread (UK) Half-year
Wednesday 28 October Results
Boeing (US) Q3
Boston Scientific (US) Q3
Etsy (US) Q3
Fiat (UK) Q3
Ford (US) Q3
GlaxoSmithKline (UK) Q3
Mastercard (US) Q3
Morningstar (US) Q3
Paramount (US) Q3
UPS (US) Q3
Visa (US) Q4
Thursday 29 October Results
Activision Blizzard (US) Q3
Amazon (US) Q3
Apple (US) Q4
BT (UK) Half-year
Facebook (US) Q3
Kellogg (US) Q3
Kraft Heinz (US) Q3
Lloyds (UK) Q3
Twitter (US) Q3
Western Union (US) Q3
Friday 30 October Results
Aon (US) Q3
Chevron (US) Q3
Exxon Mobil (US) Q3
Intosol (UK) Half-year
Natwest (UK) Q3
Under Armour (US) Q3

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


Disclaimer: 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.