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Market Outlook

The Week Ahead: US non-farm payrolls; HSBC, BP, AMC results

Read our pick of the top stories to look out for this week (2-6 August), and view our key company earnings schedule.

Michael looks back at the swings in equity markets and ahead to the latest US jobs report and non-farm payrolls, plus the Bank of England policy meeting. He also previews the latest results from HSBC, BP and Rolls-Royce, and analyses recent weakness in the US dollar. Michael also provides analysis of the key levels on the FTSE 100, Nikkei 225 and US markets, as well as forex, including GBP/USD and EUR/USD.

HSBC half-year results

MON 2: In terms of share price performance there hasn’t been much to cheer about for HSBC shareholders, given that year-to-date it has seriously unperformed its UK peers, with only Standard Chartered faring worse. The HSBC share price have been under pressure since peaking in May, despite an improvement in profitability when it reported its Q1 numbers at the end of April. As the UK’s largest bank and one of the biggest in Europe, HSBC reported income of $5.8bn, a decent increase on the $3.2bn in Q1 of last year. Most of the bank’s profits came from its Asia business, and the improvement in Q1 saw the bank recycle $400m of last year’s $8.8bn loan loss provisions back on to the balance sheet.

Management cited an improvement in the economic outlook of its UK business as part of the reason for the outperformance, with mortgages doing particularly well. The UK business was able to generate profits of $1bn in Q1 because of this improved demand, and the hope is that this trend will continue in Q2. The global banking and markets division also had a decent Q1, although expectations here have been tempered somewhat in light of the slowdown seen in US bank earnings on the fixed income side. Net interest margins are also likely to continue feeling the squeeze, given the recent flattening in bond yields. The bank is also undergoing a significant restructuring programme in an attempt to slash costs, and we could get further details on its plans to cut office space as a result of the pandemic.  

BP half-year results

TUE 3: With oil prices up near three-year highs, you may think that BP’s share price would have risen along with it, and while it’s up this year, it’s fallen since its Q1 update. This seems strange given that its outlook for a cashflow surplus is based on an oil price of $45 a barrel. Its Q1 numbers were also very positive, as it met its debt reduction target ahead of schedule. BP reported underlying replacement cost profit of $2.6bn, its best performance since 2019 and compared with $100m in Q4, driven by higher energy pricesand better refining margins. BP also said it was looking to resume buybacks, and that with gasoline and distillate demand in Q2 set to pick up as economies reopen, the outlook was set to brighten further.

Having seen $1.7bn of positive cashflow in Q1, BP did say that cashflow in Q2 would be impacted by its annual $1.2bn Gulf of Mexico oil spill payment, and that as a result was likely to see a deficit for this quarter, however that isn’t likely to explain the share price weakness. It could be that shareholders aren’t convinced that plans for a 40% reduction in oil and gas production is achievable without hammering margins. The transition towards green energy is likely to be expensive, and while a noble goal it needs to be done within the practicalities of its cashflow. Having invested into wind power leases in the Irish Sea it’s clear what the direction of travel is, while Lightsource is also delivering on its projects. For now, BP’s share price performance suggests the jury remains out on whether it will be able to pull off its ambitious plans, though an oil price up towards $70 a barrel and a pickup in demand for gasoline and distillates will no doubt help as far as this latest quarter is concerned.   

Activision Blizzard Q2 results

TUE 3: Gaming has done very well as a consequence of the various pandemic lockdowns, as people stuck at home play console games or binge watch TV box sets. Since the beginning of 2020, the shares have done very well, however they have stalled this year, after hitting record highs in early February. The maker of World of Warcraft and Call of Duty has been in the news recently for all the wrong reasons, over claims of sexual harassment and a bullying culture, with a lawsuit in California alleging this as well as unfair pay.

In Q1, revenues jumped by 27% to $2.28bn, driven by sales of Call of Duty Black Ops Cold War, as well as the free to play Warzone and Call of Duty Mobile, which helped push mobile usage up 47% to 150m users. Subsidiary King also saw decent growth with Candy Crush franchises helping to generate $609m. For Q2, Activision is expecting net revenue to increase to $2.14bn and earnings per share to rise to $0.81 a share. The company also raised its full-year guidance in May to an estimated revenue of $8.37bn, and annual EPS of $2.91 a share.

UK, US, France & Germany services PMIs (July)

WED 4: The latest flash PMIs from both the UK and US saw surprise falls during July. One reason for the decline in UK services activity, which is expected to be confirmed with a fall to 57.8, is a direct consequence of the so called ‘pingdemic’, which hampered the economic activity of employees who were self-isolating after being ‘pinged’ by the NHS Track and Trace app. Business optimism about the economy is also declining, especially given ongoing concerns about labour shortages, even before enforced employee absences.

In France and Germany, while the readings in both manufacturing and services were resilient, we are also seeing evidence of weakening economic activity, albeit from a fairly high base. German manufacturing and services activity are both above 60, albeit off their peaks but still strong, although the recent flooding there may lead to economic activity slipping towards the end of July. One notable takeaway from all the reports was rising input costs, which for now don’t appear to be impacting supply chains, but are likely to in the coming months. Cost pressures remain notably high in both the UK and the US.

Rolls-Royce half-year results

THU 5: It’s been an uneventful three months for the Rolls-Royce share price, which given some of the moves in recent years is probably a good thing. Nonetheless the pandemic has had a chilling effect on the company’s prospects, given how closely aligned its fortunes are to civil aviation. In May, management was at pains to focus on a specific narrative, choosing to focus on a more positive outlook. Of course, that only works if the path out of the crisis is clear, and while Rolls-Royce has taken significant steps to reduce head count and cut costs, and said it was on course with a further £1.3bn of annualised cost savings, the business is still heavily reliant for a good proportion of its annual revenue on engine flying hours (EFH). Even with the success of the vaccine programme these have been below expectations, due to the various traffic-light restrictions imposed by the UK, as well as foreign governments.

In the first four months of 2021, large EFH were at 40% of 2019 levels, supported by demand for cargo and maintenance of key routes. The company remained optimistic about the rest of the year and that it would meet its 55% level from six months ago. Shareholders will certainly be hoping so, and it’s true that travel has risen, but as recent trading updates from the likes of easyJet showed, it flew only 17% of its overall capacity in Q3, though it was optimistic about Q4.

Such is the pressure on Rolls-Royce’s finances due to the slow summer for aviation, that it asked its 19,000 staff to take unpaid leave for two weeks as it strives to preserve cash. Shareholders should be prepared for the 55% target to be lowered to somewhere closer to 40%, which was a severe and plausible scenario a few months ago. The company may also have to revise its forecasts of turning cashflow-positive in the second half of 2021, and for £750m in 2022, estimates which are based on EFH of 80% of 2019 levels, with the defence part of the business the only silver lining.

Bank of England policy decision

THU 5: With the departure of Andy Haldane as chief economist at the last meeting, there was little expectation of any discussion on the merits or otherwise of the Bank of England’s monetary policy strategy for its bond buying programme. The lack of divergence between policymakers on the current status of monetary policy has been quite notable in recent months, despite the rebound in recent economic data as the Q1 lockdown was eased. It was therefore with some surprise that two Bank of England policymakers broke ranks in the last few weeks to question the merits of current policy, suggesting that the asset purchase programme might need to be reined in.

Perhaps we shouldn’t have been too surprised by deputy governor Dave Ramsden being the first to break ranks, given his resistance to negative rates less than a year ago. His comments that the case for considering the paring back of some stimulus measures was rising were noteworthy in acknowledging that the vaccine programme has potentially changed the game when it comes to dealing with the virus. It was also notable that he was joined in this view by external MPC member Michael Saunders, in expressing rising concern at how transitory or otherwise inflation levels were likely to be.

The comments from both came in the aftermath of recent unemployment data, which showed that there appears to be up to 1m vacancies which UK businesses are struggling to fill, as the economy starts to reopen, raising concerns about a wage price spiral in the coming months. While there is little likelihood of a change in policy at the meeting this week, it will still be noteworthy if there is dissent on the pace of the bond buying programme, and whether the Bank will look at slowing the pace.  

Beyond Meat Q2 results

THU 5: A lot of the early froth appears to have come out of Beyond Meat’s share price, with the shares little changed on the year, although they are still well above their IPO price. The company has had a mixed pandemic, with its Beyond burgers feeling the impact of the closure of restaurants. This was partially offset by increased sales of its prepacked grocery products, however its Q1 numbers still showed a bigger-than-expected loss of $0.42 a share, while revenue also missed expectations, coming in at $108.2m.

Beyond Meat’s biggest problem has been increasing costs, as it looks to boost production capacity in order to compete globally, with new facilities in China and the Netherlands. As lockdown restrictions ease the company said it was optimistic that Q2 revenue would increase to between $135m and $150m, however competition in the sector is increasing with the likes of Impossible Foods cutting its prices to compete with Beyond Meat. Losses are expected to come in at $0.23 a share.

Virgin Galactic Q2 results

THU 5: Since Virgin Galactic reported its Q1 results in May, the share price has been on a bit of a rollercoaster ride, soaring back towards the highs of earlier this year, before almost halving in the aftermath of the successful test flight to the edge of space, which saw Richard Branson ride shotgun. One of the reasons behind the decline was the company saying it wants to  raise another $500m in stock. While this was a key milestone for the business, it now raises the question as to how quickly it can monetise the huge amounts of investment ploughed into this project.

In Q1, Virgin Galactic posted a net loss of $130m and wasn’t sure when it would be able to launch its first flight. With no revenue coming in over the last two quarters and with over $600m in cash, there will come a time when investors will want to see funds coming and not just going out. The first test flight was significant, but now investors will be looking to see how quickly subsequent flights make it on to the launch calendar, and if not this year, then next, as the company looks to make inroads into the 600-ticket backlog. Losses are expected to come in at $0.33 a share.        

US non-farm payrolls (July)

FRI 6: The June jobs report turned out to be much better than expected on the headline number. The 850,000 jobs added was a decent improvement on May’s 583,000, but it didn’t tell us too much about the overall state of the US labour market in terms of how quickly those US workers who have dropped out of the workforce since February last year are likely to come back. What was particularly disappointing was that the unemployment rate edged higher to 5.9%, against an expectation of a fall of 5.6%, while the participation rate remained unchanged at 61.6%. This appears to be more of a concern for some on the FOMC than the big rise in prices in some of the latest economic data.

New York Fed president John Williams is one member concerned about the lacklustre participation rate, given where it was pre-pandemic at 63.4%. Since the June report, little has changed in the US economy, with most expectations that the Fed will remain on autopilot until Q4, whatever inflation does. July’s report comes against a backdrop of continued rising prices, and weekly jobless claims that appear to have found a base around the 400,000 level. Some US states are already phasing out some of the emergency benefits brought in as a result of the pandemic, in an attempt to force people back to work, and off their stimulus payments. This should work in part; however, it’s unlikely to be enough to fill the over 9m job openings. This appears to be what is causing sleepless nights at the Federal Reserve. How many of those 7m people no longer in the labour force and not reflected in the current participation rate will come back? How many have retired early or set up their own businesses? Quite simply it seems too early to know, and while the Fed can talk about the merits of tapering or rate rises, it can’t do anything about the unemployment number. Expectations are for 925,000 new jobs to be added in July.      

AMC Entertainment Q2 results

FRI 6 (tbc): Cinemas have borne the brunt of the various lockdowns because of the pandemic, not that you’d know it from the performance of AMC Entertainment’s share price this year. The shares finished 2020 at a lowly $1.35, as speculation abounded that it was on the verge of bankruptcy. That outcome was only averted at the end of January with a $917m cash infusion, with half coming from investors who purchased shares in a stock offering. At the end of its last fiscal year, AMC was burning through $125m a month to keep 438 of its US real estate open, with little or no customers and not many films to show. In 2020 the company lost $4.6bn, and while some US states have allowed cinemas to open, they have all been on condition of various restrictions.

AMC has enjoyed some good fortune on the way: without the Reddit meme stock fallout which saw it get swept higher along with GameStop, it probably wouldn’t have been able to raise any of the additional capital, as shares soared to record highs of $72, valuing the business at over $30bn, despite having little or no revenue coming in. The rise in US vaccination rates has seen more people return to the cinema, however AMC’s biggest problem is a lack of big box-office films to get customers through the door.

As AMC’s share price hit a new record high in June, management seized the opportunity to raise more money by selling another 11.5m shares to pay down some of its debts as well as build its balance sheet. This did see the shares drop back modestly, but not by enough to suggest the air was coming out of this box office turnaround story. In May, just a month before the June share sale, AMC posted a quarterly loss of $567m on revenue of $148.3m. With a lot of the new shareholders amongs the so-called Reddit traders, the shares seem on a much firmer base despite the awful state of the finances. AMC still expects to be cashflow negative for at least the next two quarters, and will be hoping the release of summer blockbusters like Black Widow will have helped boost its numbers in Q2.

AMC’s biggest problem will be persuading cinemagoers to come back, having got used to streaming on demand, as well as the luxury of the pause button on a 55-inch TV. The shares did come under pressure after Marvel’s Black Widow release at US cinemas, when the data showed that $60m of streaming transactions took place for the film. If this was replicated with other simultaneous releases and facemasks remain a requirement, it suggests the potential loss of 5-6m worth of potential footfall. Losses are expected to come in at $1 a share, or $510m.

Uber Q2 results

FRI 6: Uber’s share price appears to have hit a settled range so far this year, and is currently close to its lowest levels in 2021. Last year the business posted an annual loss of $6.77bn, which while better than expected, was still only a 20% improvement on the previous year's $8.51bn losses. Given that the company’s ride-sharing business has been decimated over the last 12 months and is only starting to recover, one could argue that this is a small victory. In Q1 losses narrowed sharply to $108m, with the food delivery business outperforming, while the sale of its self-driving unit ATG for $1.6bn also helped. The $108m loss compares favourably with the Q4 loss of $968m, however despite the benefit from the $1.6bn that it received for ATG, the company still couldn’t turn the red ink to black. Q1 revenues also fell short of expectations, coming in at $2.9bn, while, on an operational level, losses were still high at $1.5bn.

The size of this deficit does call into question Uber’s optimism that they can turn a profit by year end, given the potential for higher driver costs. On the plus side, revenue for its delivery business is improving, which you would expect, and it’s also starting to move into grocery delivery as well. This improvement in its delivery business appears to be behind the recent resilience. Uber is also looking to move into freight, with the recent deal to buy Transpace for $2.25bn.

As we look ahead to the current quarter, we should see a further increase in bookings as more people leave home due to increasing confidence in rising vaccination rates, although deliveries might fall for the same reason. As with anything to do with Uber there is a downside, with the prospect that costs will increase after the company was forced to classify all of its drivers as workers, meaning they are all entitled to minimum wage protections and other employment rights, after the UK Supreme Court ruled against the business earlier this year. Losses are expected to come in at $0.52 a share.

Index dividend schedule

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

Selected company results

Monday 2 August Results
HSBC (UK) Half-year
ON Semiconductor (US) Q2
Tuesday 3 August Results
Activision Blizzard (US) Q2
BP (UK) Half-year
Direct Line Insurance (UK) Half-year
Domino's Pizza (UK) Half-year
Hyatt Hotels (US) Q2
Greggs (UK) Half-year
Lyft (US) Q2
Marriott International (US) Q2
Match (US) Q2
Ralph Lauren (US) Q1
Standard Chartered (UK) Half-year
Travis Perkins (UK) Half-year
Under Armour (US) Q2
Wednesday 4 August Results
Abermarle (US) Q2
Etsy (US) Q2
Fox (US) Q4
General Motors (US) Q2
Legal & General (UK) Half-year
MGM Resorts International (US) Q2
Playa Hotels & Resorts (US) Q2
Taylor Wimpey (UK) Half-year
Thursday 5 August Results
Beyond Meat (US) Q2
Evraz (US) Half-year
Frasers Group (UK) Full-year
Hammerson (UK) Half-year
Groupon (US) Q2
Kellogg (US) Q2
Motorola Solutions (US) Q2
Park Hotels & Resorts (US) Q2
Rolls-Royce (UK) Half-year
TripAdvisor (US) Q2
ViacomCBS (US) Q2
Virgin Galactic (US) Q2
WPP (UK) Half-year
Friday 6 August Results
AMC Entertainment (US) - tbc Q2
Liberty Media (US) Q2
London Stock Exchange Group (UK) Half-year

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


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