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Cautious start for Europe, Commerzbank posts a record loss

Commerzbank

Concern about rising inflation expectations has seen a sharp rise in bond yields over the past few weeks, with central bankers almost falling over themselves to reassure that they don’t see rising prices as an imminent threat.

Yesterday Fed chief Jay Powell doubled down on this narrative by pledging to look through short term price fluctuations, saying that the US economy was still very fragile, and that the central bank would wait until the economy reached full employment, and inflation rose above 2% before even considering a tightening of policy.

The latest inflation numbers for January, from the US as well as China both showed, that for now, inflationary pressures were still subdued, in turn helping to pull US 10 year yields down from their recent 11-month highs, while US 2-year yields hit a record low of 0.0972%

This caution over inflation prospects saw US markets undergo another little bit of a pause yesterday, despite posting new record peaks with a mixed finish, while Asia markets were subdued with lunar new year holidays seeing China, Japan and South Korean markets all closed.

Markets here in Europe have started the day in a positive fashion, however in terms of gains on the week it has been hard work, with early gains soon giving way to weakness later on in the sessions.

Financials are a laggard today, with Germany’s second biggest bank Commerzbank reporting a record Q4 loss of €2.7bn, as new CEO Manfred Knof embarks on yet another turnaround strategy for the beleaguered bank.

The dividend has also been scrapped while the bank has said it will close half of its retail branches, and close 30% of its overseas operations in a move that has all the hallmarks of a hatchet job in order to cut €1.4bn of annual costs, and reduce headcount by 10,000 over the next two years. Revenues in Q4 were also lower than expected, while the bank set aside €1.75bn in respect of non-performing loans. While the scope of these changes are headline grabbing they are long overdue, given the uncompetitive nature of German retail banking, and the reluctance to take action several years ago.  

Royal Dutch Shell this morning set out its production outlook over the next few years, saying that it believes that production in oil peaked in 2019, while setting out targets for reducing carbon output all the way out to 2050, with the intention of reducing its footprint by 20% by 2030 and 45% by 2035. Annual oil production is expected to decline by 1-2% a year until 2030.

Shell has also committed to spend on average $2bn to $3bn each year towards renewables and energy solutions. This still seems a low number percentage wise when compared to comparable capex spend in other areas of its business, and an annual capex spend of $20bn.

AstraZeneca shares are modestly higher after reporting a 10% rise in product sales, and more than doubling its profits before tax to $3.14bn.

Most of its product sales either saw an increase in revenue, or came in as expected, with the exception of Brilinta, its blood thinning product, which came in short. There was some disappointment over the guidance for 2021, however with the shares just above one-year lows it could be argued that most of this is already priced in, hence today’s move higher.  

Royal Mail this morning delivered a decent set of Q3 numbers, pushing its shares to their best levels since September 2018, having seen the busiest quarter in the company’s history with 496m parcels handled. Service quality was impacted as a result of this turnover; however, group revenues have seen a 20% increase year on year.

Parcel revenues year to date have seen a rise of 37% to £3.83bn, while letter volumes have fallen 23%.

Group revenue is up to £9.3bn, the highest level of quarterly growth since privatisation in 2013, with Royal Mail contributing £6.4bn to that number.  

In terms of profitability management expect that adjusted operating profit will be well in excess of £500m despite significant increases in costs as a result of the pandemic.  

Coca-Cola HBG, the bottling and packaging company, is the best performer on the FTSE100 after reporting that it had improved its profit margins, despite seeing a fall in annual volumes and revenues, due to changing consumer behaviour as a result of the Covid-19 pandemic

Ted Baker’s latest numbers have seen Q4 revenue fall 47% due to the covid-19 pandemic. While e-commerce sales were positive in Q3, there’s been less of a lift in Q4, though they still represented 63% of total retail sales, compared to 33% the previous year.

In Q3 CEO Rachel Osborne insisted that free cash flow would be positive this year in spite of all the restructuring efforts and covid-19 headwinds. This now looks less likely given that costs are likely to increase by £5m due to associated Brexit related costs, with the shares down over 5% in early trade.   

US markets look set for a positive open with the main focus expected to be the latest weekly jobless claims numbers, which are expected to see further improvements as they continue to fall from their recent January peaks of 926k. Last week we saw a fall below 800k to 779k, and this number is expected to fall further today to 760k.

Uber shares slid back in aftermarket trading last night despite narrowing the level of its losses, though they still remain eye-wateringly high. Losses for this year came in at $6.77bn, which while better than expected were still only a 20% improvement on last year's $8.51bn losses. Given that the company’s ride sharing business has been decimated this year one could argue that this is a small victory, and revenues for its delivery business are improving, which you would expect to see anyway

Delivery saw an increase of 130% to $10.05bn while ride sharing revenues halved, coming in at $6.79bn. The hope is that once the world returns to some semblance of normal, post pandemic ride share revenues will improve, reducing the size of the annual losses.   

Coca Cola Q4 earnings also fell foul of the pandemic as annual revenues fell short at $8.6bn, though profits were better than expected at $0.47c a share. The company is in the process of slimming down its drink’s portfolio by about 50% with the focus on its more mainstream brands like Dasani, Coca Cola as well as fruit juice and tea and coffee.

We also have the latest numbers from Disney after the bell. Disney+ subscriptions are likely to be the main focus as it takes on Netflix, Amazon Prime and Apple TV+. Undercutting on price may seem like a no-brainer, and while we’ve seen a big uptake on the subscriptions front with over 86.8m in the first year when the company reported in December it still has some way to go to compete with Netflix in terms of content depth. The service is also operating at a loss, which means it’s had to bite the bullet and will be increasing prices, with a basic UK subscription rising to £7.99 a month in March. That still means it’s cheaper than the likes of Netflix which has also increased its prices; however, its content while still good remains well short of the diversity in Netflix’s library.

Additional content is also an added cost, with the decision to charge up to $30 to view its Mulan film a little presumptuous, and falling flat. Disney also has the added drag in terms of losses at its film studios, theme parks and resorts, as a result of the pandemic. The company has already shed up to 32k jobs in this area alone, while also reinstating the temporary executive pay freezes in a move that in terms of optics looks awful and lacks empathy. In its last set of numbers, the “Mouse House” lost $710m, while revenues slumped to $14.7bn. Losses for this quarter are expected to come in higher for Q1, at $0.30c a share.


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