European markets have got off to a weak start this morning in the wake of a mixed Asia session, and a softer US session. This shouldn’t be entirely unexpected given the multi-month peaks we saw yesterday, as investors absorb a deluge of company updates from across a range of different sectors.
It is important to note that while a lot of the headline numbers have come across as positive, there has been a lot of expectations management done since the beginning of the year, and as such the bar is much lower now, and some of the internals of some of today’s updates do point to areas of weakness.
We’ve seen another deluge of updates from European banks this morning with UBS following in the footsteps of Credit Suisse yesterday by also reporting a better than expected jump in Q1 income, as wealth management attracted more than $22bn in new funds. It wasn’t all good news with the investment banking division seeing a decline in revenues of 27%.
In terms of expectations management CEO Sergio Ermotti played a blinder last month when he stated that the quarter was shaping up to be one of the worst in recent history, which meant today’s bar as a low one. Nonetheless UBS is in much better shape than it was a few years ago, given the radical surgery on the business model which was identified early on and acted upon.
Barclays latest Q1 numbers also pointed to a difficult quarter with profits before tax coming in at £1.5bn, down from the same period a year ago. The company said it was looking to cut costs further in light of the difficult trading environment which suggests that management aren’t confident about the outlook.
Credit impairment charges increased to £400m while the investment banking part of the business, an area under scrutiny from activist investor Edward Bramson, had a better quarter with an increase in total income to £2.5bn, driven by a big improvement in FICC which saw revenues rise to £902m from £570m in Q4. Equities also improved up after a weak performance in Q4, rising to £467m but were still below the levels seen a year ago. Banking fees and corporate lending also declined from the levels we saw in Q4.
Tomorrow’s Royal Bank of Scotland’s Q1 numbers look set to be overshadowed by the news that CEO Ross McEwan has resigned and will leave a year from now. While the timing is surprising McEwan can consider the past few years a job well done, with the underlying business profitable, and most legacy issues in the rear view mirror.
A key test for any CEO is have they left the business in better shape than when they joined? In the case of McEwan, RBS is undoubtedly in better shape than when he joined, and while one can legitimately question some of the banks actions in terms of responsibility over what happened with the banks GRG unit, the bank is on a much more solid foundation than when he took over.
This morning the Competition and Markets Authority confirmed its decision to block the proposed merger between Asda and Sainsbury, the second and third biggest supermarkets in terms of market share. While some have questioned the logic behind some of its conclusions Sainsbury confirmed that they would be abandoning the proposal. Having drawn a line under this episode CEO Mike Coupe will need to refocus his and management attention on the underlying business having seen it slip below Asda to number three UK supermarket in terms of market share. Next week’s numbers are likely to act as a wakeup call to refocus on that and decide how to react to the continued erosion of their business to the likes of Aldi and Lidl.
The UK housing market has been experiencing a little bit of a slowdown in recent months in terms of houses sold, however that doesn’t appear to have affected trading at Taylor Wimpey which has stated that trading in the first four months of 2019 has remained steady.
Average private sales per week are up from the same week a year ago, though the company did state that they were starting to see higher cost price inflation which is likely to eat into profit margins, over the remainder of the year, and this appears to have prompted a bit of a selloff across the sector this morning, after Taylor Wimpey shares hit a six month high yesterday . Persimmon and Barratt Development shares are also lower as concerns about higher cost price inflation eating into profit margins knock the shares lower.
In the airline sector Norwegian Air Shuttle announced that Q1 pre-tax losses came in at NKr1.98bn, while revenues also came in below estimates at NKr7.99bn. The grounding of its 18 737 MAX 8 aircraft haven’t exactly helped, entailing additional costs of NKr500m, and the effects of this are still being assessed according to management.
Even without the problems with the MAX8, which makes up 10% of its fleet, revenues were still down by 3% while rising fuel costs added 5% to its cost base.
On the currencies front the US dollar has continued to push higher, now at a 23 month high as markets price out the prospect of a possible rate cut, by year end. Recent weak economic data, along with some mutterings from senior US officials about the prospect of a rate cut had started to get priced into market expectations of what the Federal Reserve might do next with respect to monetary policy. The latest earnings numbers along with recent economic data has prompted markets to price any prospect of a US slowdown further out into 2020, and this has seen the US dollar push higher in the last two weeks to its highest levels since May 2017.
On the earnings front Tesla and Facebook shares are likely to be in focus when US markets open with Facebook shares trading higher in US after-hours trading after posting Q1 revenues of $15.1bn, and net income of $2.43bn, though this number has to be set in the context of a $3bn charge which has brought this figure down from over $5bn. Average revenue per user was higher , as was monthly active users as growth from its stories functionality outweighed concerns about privacy and data regulation.
Tesla Q1 numbers were late in being released and were disappointing, with the company posting a bigger than expected loss for Q1 of $702m as the problems with Model 3 deliveries weighed on the bottom line. Guidance for 2019 deliveries was kept unchanged at 360k to 400k cars, something that the market, not unreasonably appears to be somewhat sceptical about. To meet its target Tesla would have to deliver at least 100k cars each quarter, for the next three quarters. This would be a record, and well above the previous record of over 90k cars in Q4 last year.
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