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European markets rebound on hopes of a fiscal response

CMC Markets

Stock market volatility continued overnight with US markets finishing the day stronger. Those gains didn’t look like they were going to last with Asia markets underperforming as investors lost confidence that the US administration would be able to deliver a timely fiscal boost and President Trump went missing from an important White House briefing. As a result US futures slid back sharply and markets in Europe also looked set for a lower open.

This changed at 7am when the Bank of England threw a 50bp rate cut into the mix just before the open, along with a new term funding scheme, with terms of up to four years, with a particular focus on SMEs. The amount of this could well be in excess of £100bn, given previous experience of the 2016 term funding scheme which was launched in the aftermath of the Brexit referendum.

If the effect was to help push European markets higher into the open the plan worked, however for the rate cut to be effective it also needs to rely on a fiscal response from new Chancellor of the Exchequer Rishi Sunak later today, otherwise this morning’s early gains could well be short-lived.

It does appear that today’s actions by the Bank of England are the first pillar of a co-ordinated policy response to coronavirus, which means that today’s budget really needs to deliver on the second pillar to be effective in reassuring increasingly nervous and jittery financial markets.

Expectations around today’s budget has seen the share prices in UK house builders and construction companies have been subject to an early boost with Balfour Beattyshares up strongly, though some of that is also likely to be down to the release of their full year numbers which showed that full year pre-tax profits rose to £200m from £181m.

Revenues were also higher up from £7.8bn to £8.4bn while the order book also rose to £14.6bn, with the business continuing to focus on more work with higher margins. This focus on maintaining margin discipline has helped this UK construction giant avoid the fate of a lot of its peers which have continued to struggle.  The company also increased the dividend to 6.4p from 4.8p.

CEO Leo Quinn said the group is continuing to focus on reducing its borrowings into 2020, and would then review the company’s capital structure one there is a clearer understanding of the COVID19 situation.

Costain shares on the other hand have tanked after management announced a plan to raise £100m in new equity capital, after the company announced a pre-tax loss of £6.6m. Revenues were down £300m to £1.16bn, as project delays and cancellations, and arbitration claims knocked out around £16m of profits. Margins, fortunately are still fairly decent, however the order book remained unchanged at £4.2bn.

House builders Taylor Wimpey, Persimmon and Barratt Developments are also enjoying early gains, while the banks have also seen a short term lift, with Lloyds up over 2%.

The pound slipped back initially on the rate cut, however we’ve seen a quick rebound on the basis that this morning’s actions, could well be positive in the longer term, with gilt yields also rebounding, with expectations of a large multi-billion pound stimulus helping to underpin the currency.

There was some reports this morning that ECB President Christine Lagarde had spoken to European leaders ahead of tomorrow’s ECB rate meeting urging them to help the ECB in reacting to what she says the risk of 2008 style crisis due to the impacts of the coronavirus. She went on to say that the ECB has an extensive tool box to address some of the issues, however it is becoming increasingly clear that  the ECB is already operating at the limits of its mandate, given that rates are already negative, and placing enormous pressure on European banks balance sheets.

The ECB can help with extra lending and new iterations of LTRO’s however the lack of a coherent fiscal response in Europe means that any actions that ECB is likely to take will differ in their effectiveness.

Therein lies the ticking time bomb at the heart of Europe, and coronavirus has re-lit the fuse. It’s up to EU leaders to act.

US futures markets have reacted to this morning’s rebound in Europe, by pulling off their lows a  touch but the Dow and S&P500 are still set to open lower, as doubts grow over the willingness of the US government to act quickly on coronavirus.

Once again the focus is back on the politicians to deliver a fiscal response. For the last ten years politicians have looked the other way as central banks have tried to take the strain on financial markets. The time to act is now and a failure to act on the part of politicians could well see markets deliver a brutal response. To paraphrase a line from the film Jerry Maguire, its time to “show me the money”


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