Market Outlook

The week ahead: global services PMIs; Tesco, Levi Strauss results

Watch our week ahead video preview, read our pick of the top stories to look out for this week (5-9 October), and view our key company earnings schedule.

Michael reviews this week's price action in equity markets, reaction to President Trump's Covid-19 diagnosis, and looks ahead to the latest US FOMC minutes, RBA rate meeting, UK data and Tesco's half-year numbers. He also looks at the key levels on all the major indices, currencies and commodities, including Gold, crude oil and the US dollar.

Global services PMIs (September) 

Monday: After the slowdown of Q2, the manufacturing sector has managed to hold up reasonably well. The recovery in the services sector has been another story, with the recent flash PMIs in Germany and France slipping back into contraction territory. This is an increasing concern, particularly for the weaker countries like Italy and Spain who tried to boost economic activity by way of tourism in the summer months. Both now appear to be paying the price with increased infection rates, with Spain especially having to impose stringent new lockdowns. The additional imposition of quarantines and other travel restrictions in the last two months is likely to see further economic deterioration in September. In August, Spain and Italy suffered contractions of 47.7 and 47.1, and it’s unlikely that September will be much better, at a time when France’s services PMI is expected to be confirmed at 47.5. It hasn’t been all bad news, as we’ve seen UK and US services data continue to improve, while Chinese services activity has also held up fairly well. The fear now, with quarantines being imposed on travellers across Europe, is that the European recovery grinds to a halt at a time when it appeared to finally be gaining traction.   

UK services PMI (September) 

Monday: In the UK there appears to be slightly more optimism, though that’s because the UK recovery is slightly behind Europe’s. In August, the UK showed a continuation of July’s improvements with a figure of 58.8, while the recent flash PMI for September showed a much more resilient 55.1. If confirmed, this would draw a line under an impressive quarterly rebound, after the lows of Q2. This is in marked contrast to the contractions expected from France and Germany’s numbers, however confidence is much lower here after the recent new restrictions announced by the UK government in response to a rise in localised infections.

Levi Strauss Q3 results 

Tuesday: The Levi Strauss share price has struggled since the company’s IPO at the beginning of last year. The underperformance has been particularly disappointing given that the company is actually profitable, unlike most of last year’s tech stock flotations. In Q2, sales fell 62%, and the clothing brand announced that it was cutting 15% of its global workforce. The company, which has a sizeable store footprint, posted a Q2 loss of $0.48 a share, excluding one-off charges, slightly above market expectations of $0.41 a share, on revenue of $498m. When you compare that to the $1.51bn in revenue posted in Q1, it's quite a sizeable impact. Levi Strauss hope that this week’s Q3 numbers will show a marked improvement, however investors are still expecting to see a loss of $0.22 a share. At its most recent update, the company reported it had total liquidity of up to $2bn, and while its inventory levels are high, management remain confident that they will still be able to shift it in the coming months.

Reserve Bank of Australia rate decision 

Tuesday: Given the current economic climate and the weakness seen in the Australian economy, there had been some speculation that we might see the RBA cut rates this month from their current record low of 0.25% to 0.1%. This expectation has been dialled back with the recent rally in the US dollar, which has pulled the AUD off its recent peaks at 0.7400. In the absence of a rate cut we might see the RBA lean in the direction of further QE, which is likely to be more effective than a nominal rate cut. The Australian unemployment rate is already at its highest level since 1999, at 7.5%, and is expected to move up to 9.25% by the end of the year. The lockdowns across the state of Victoria do now appear to be having an effect in slowing the virus, which could help stay the RBA’s hand when it comes to further easing. However, whether it comes this week or next month, markets are now pricing in the possibility of further measures.

US Federal Reserve FOMC minutes 

Wednesday: The most recent federal open market committee (FOMC) meeting didn’t really tell us too much beyond what Fed chairman Jay Powell outlined at Jackson Hole. The lack of action did prompt a bit of a market tantrum; however, we did get slightly more detail on the new policy of average inflation targeting. The central bank did pledge to keep rates well anchored until 2023, or at least until inflation has been higher than 2% for quite some time. That’s certainly an ambitious bar for their new policy, given that core PCE has only been above 2% twice in the last decade, during a short period in 2012, and for most of 2018, when the bank was in the middle of a series of rate rises. The Fed’s main problem was the proximity of the November US election. It also remains far from clear how the Fed will achieve a policy goal that it has already found very difficult to meet over the last 20 years. The discussions between the various FOMC members will also be instructive, with Minneapolis Fed chair Neel Kashkari and the Dallas Fed’s Robert Kaplan standing apart from the consensus, for different reasons. Kashkari dissented because he wanted a stronger commitment to not raising rates for the foreseeable future, while Kaplan dissented because of concerns that the commitment to a lower-for-longer policy would encourage over-excessive risk-taking.  

Tesco half-year results 

Wednesday: When Tesco reported its full-year numbers in April, there was some criticism that it was paying a dividend to shareholders at a time when it was benefiting from a business rates tax cut, along with a host of other measures designed to help the hard-pressed retail sector ride out the Covid-19 lockdown. This may be a valid criticism, however Tesco, along with the rest of the supermarket sector, has faced challenges of its own as a result of the crisis. These include a sharp rise in costs, of up to £840m, as the company added 4,000 new positions since March, along with the risks to its staff of staying open to feed the nation. This has presented challenges not only to its supply chain, but also to its ability to meet and boost its online and physical delivery targets.

In Q1 the group reported a 7.9% increase in like-for-like (LFL) sales in the first quarter, with an 8.7% rise in the UK. The company also spent £4m in more than doubling its delivery capacity from 600,000 to 1.3m slots per week. In June, Tesco announced the sale of its loss-making Polish business for £181m, removing one of the key drags on profitability. Tesco Bank has also been a drag, with expectations of a full-year loss of up to £200m. One main advantage Tesco does have is the size of its stores, which makes social distancing easier, however its margins have continued to come under pressure from the likes of Aldi and Lidl, who have continued to grow their market share, as well as take on new staff. Tesco has also announced plans to boost its own delivery capacity, with the announcement that it will be adding 16,000 new jobs due to recent changes in customer shopping habits. Before the pandemic, online activity amounted to 9% of total sales – this has almost doubled to 16% in the space of six months.

Electrocomponents Q2 results 

Thursday: Electrocomponents is a distributor of industrial and electronics products, under the umbrella of six separate brands, serving over 1m customers in 80 countries. At its last trading statement, the company reported revenue declines in all of its key markets, largely as a result of the shutdowns in the three-month period to June 2020. Northern Europe saw the biggest fall with a drop of 14%, despite all of its distribution centres remaining operational throughout the period. Asia Pacific saw the smallest decline of 4%, with China and Australia helping with a positive performance during the quarter. The economic reopenings in Q2 are likely to see a much-improved performance, with June likely to show the strongest rebound. The company’s RS Pro brand returned to growth in June, with management taking steps to maintain its gross margins. In terms of the current fiscal year, management warned that revenues would probably be £3m lower due to fewer trading days than the previous year.      

Delta Air Lines Q3 results 

Friday: Delta was one of the few airlines at the end of 2019 that was having a good year, largely down to the fact that it didn’t have any Boeing 737 MAX’s in its fleet. Record revenue and decent profit were largely helped by sales of premium-class tickets. But in the space of three months this had been turned on its head, with CEO Ed Bastian having to go cap in hand to the US government, along with the rest of the airline sector, for a portion of a $25bn bailout for the entire sector. As airlines slowly try to resume operations, business has struggled to get back to anywhere near normal. Business travel, which was a big earner for Delta, has fallen off as companies realise that lots of meetings can take place through remote conferencing. In Q2, the company reported a net loss of $5.7bn as passenger numbers declined 93%, and revenue dropped 91%. In September, the airline announced it was looking to raise $6.5bn in new bonds and loans, backed by its SkyMiles loyalty programme, in order to help bolster its balance sheet against a slowdown that is likely to last a lot longer than originally envisaged. Airlines globally had been hoping that a resumption of capacity to levels above 60% of normal levels would take place by the beginning of Q4. This now looks like wishful thinking, with September capacity likely to be 60% below last year’s levels, and unlikely to improve any time soon. In Q2, Delta expected to add 1,000 new flights to be scheduled in July and August, though management quickly cut this back to 500. Q3 losses are expected to come in at $2.97 a share.

UK GDP (August) 

Friday: Since the record -20.4% contraction in April, the UK economy has undergone a gradual month-on-month rebound in activity. In May the economy grew by 1.8%, and then 8.7% in June, followed by 6.6% in July. Due to the slow and gradual reopenings of various businesses, there is likely to be a similarly positive reading in August, with the recent ‘Eat Out to Help Out' initiative giving a significant boost to economic activity. The best could still be to come, given that September may also be a decent month, but economic activity from here on in could start to tail off significantly as we head into Q4 in the face of tighter restrictions, and concern over a no-deal Brexit.     

UK manufacturing/industrial production (August) 

Friday: As with everything else in recent months, there’s been a solid rebound in manufacturing and industrial activity in Q3. This looks set to continue in August, with the fourth successive monthly gain expected in the manufacturing sector. Recent manufacturing PMIs have been very solid and August’s numbers are likely to confirm this trajectory for both manufacturing and industrial production, as well as construction output. The reality is that even with all the economic reopenings since July, it will be enormously difficult to claw back the rest of the lost output quickly. The new restrictions being imposed and ongoing social distancing will continue to act as a handbrake on further improvements.

Index dividend schedule

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

Monday 5 October Results
Quadrise Fuels (UK) Full-year
Tuesday 6 October Results
Levi Strauss (US) Q3
Paychex (UK) Q1
Wednesday 7 October Results
Lamb Weston (US) Q1
RPM International (US) Q1
Tesco (UK) Half-year
Vertu (UK) Half-year
Thursday 8 October Results
Acuity (US) Q4
Electrocomponents (UK) Q2
Helen of Troy (US) Q2
Stolt Neilsen (UK) Q3
Friday 9 October Results
Delta Air Lines (US) Q3

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


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