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European stocks edge higher on recovery optimism

European markets have continued to gain ground this week with another positive start, as confidence returns after the turbulence of last week’s Reddit inspired sell-off.

While equity markets are gradually recovering their footing, there is still an element of uncertainty surrounding some of the aspects of what happened last week, as well as any steps politicians and regulators might take in response to those events.

BT hasn’t had a great time of it recently, losing out to Vodafone for Virgin Media’s 5G service last month, the company is also facing a challenge in Italy with the start of the trial into the false accounting that was uncovered at its Italian business, where management and staff are accused of attempting to conceal more than €280m of losses, as well as inflating revenues between 2013 and 2016.

Things do appear to be looking up however, in Q2 its ultra-fast broadband rollout hit record levels of 40k households per week, and this has continued in Q3, as consumers stuck at home upgrade their connectivity at an ever-increasing rate.

While its global and enterprise divisions face the challenge of rapidly changing business environments, as fixed phone lines get used less, its Openreach division is working harder than ever, in rolling out FTTP broadband, while 5G take up has also accelerated, making it ever more important that it remains under the BT umbrella.

Today’s Q3 update helps to reinforce the optimism that BT will meet its profit guidance for the full year of £7.3bn to £7.5bn, as well the expectation that the dividend will be restored to 7.7p a share in the next fiscal year.

This morning’s numbers from Shell are a bit of a horror show and bear out the challenges facing the industry. On an adjusted basis full year profits fell 71% to $4.8bn, however on an unadjusted basis we saw a loss of $21.6bn.

The recent rebound in oil prices may well have helped margins in Q4, however the various lockdowns being imposed have made that benefit somewhat moot given that lower demand has seen cash flow from operations fall by 39% to $6.3bn, as lower production volumes acted as a drag on the business. 

In terms of its debt levels, while the company has taken steps to reduce it the from the levels a year ago when it was at $79bn, the levels have edged back up in Q4 to $75.4bn, from $73.4bn at the end of Q3, pushing the gearing up to 32.2%. This is higher than the 29.3% a year ago.  

Whichever way you look at it these numbers are disappointing, lower production volumes, reduced cash flow and a rise in net debt, and while CEO Ben van Buerden may point to a “extraordinary year” pointing to implementing tough but decisive actions, the reality is there’s not a lot to cheer in these numbers, despite the share price edging higher in early trade.

Unilever’s final results appear to have underwhelmed investors despite reporting underlying operating profits of €9.4bn, a decline of 5.8%. In Q4 underlying sales growth did show signs of picking up, rising 3.5%, however a decline in operating margins of 60bps maybe undermining sentiment a touch.

On a more optimistic note, management restored its forecasts for multiyear sales growth on optimism over returning demand in the core markets of the US, India and China. Also performing well was the e-commerce business which saw an increase in revenues of 60%.

House builder Barratt Developments shares have moved higher after reporting a decent set of H1 numbers and announcing an interim dividend of 7.5p a share. First half revenues rose by 10.1% to just under £2.5bn, while total completions rose by 9.2% to 9,077. Profits rose to £430.2m in spite of a decline in operating margins of 160bp.

Today’s Bank of England meeting isn’t expected to yield too much in the way of surprises, despite the recent slump in economic data seen in December and January. It should surprise no-one that the UK economy is struggling when most of the population is confined to their home, and local area.

The central bank is likely to focus on the efficacy of the extra November stimulus, as well as looking ahead to the progress in the vaccine roll-out when it comes to looking at policy, for the next few weeks and months. We are still likely to see shorter term GDP forecasts tweaked lower, however these could well be offset by a brighter longer-term outlook.

In terms of the debate around negative rates the mood music has shifted in recent weeks. While some on the MPC still appear enthusiastic about the prospect it is hard to see how cutting rates further can help an economy that is essentially shutdown, with people confined to their homes.

It has been notable in recent days that Governor Andrew Bailey has been slightly less enthusiastic about the workability of negative rates, than he was before Christmas, probably because the UK financial services sector has pointed out to him that they can significantly harm the banking sector.

As such we can expect little in the way of change on the monetary policy front, despite the prospect of a technical recession for the UK economy. With Brexit now in the rear-view mirror and the prospect that with a successful vaccine rollout we could well see a strong summer rebound, ahead of Europe, the central bank is likely to focus on that.

The US dollar has been gaining ground in recent days, helped by rising optimism over the US economy, along with higher inflation expectations, helping push the euro back below the 1.2000 level for the first time in two months. The euro has also come under pressure against the pound as optimism over the UK’s vaccine rollout dulls the attractions of Europe and the single currency.

US markets look set to open higher modestly higher after a lacklustre session yesterday which saw US stocks finish the day mixed.

In the wake of yesterday’s better than expected January ADP payrolls report, today’s weekly jobless claims are expected to show a further fall after last week’s fall to 847k from 900k. a number in the region of 830k is expected as expectations grow that the declines in job growth seen in December get reversed in January, ahead of tomorrow’s US payrolls report.

We also have the latest Q2 numbers from Peloton which has been another big winner from the pandemic. A surging share price as well as rising sales and revenues saw a decent Q4 profit of $89.1m and a rise in annual revenues of $1.83bn. At the end of the previous fiscal year management expressed optimism about the outlook for 2021 projecting annual sales of between $3.5bn and $3.65bn, which would be over double from the $1.46bn of sales in its last fiscal year. Its margins are also healthy, almost Apple-esque at over 40%.

Peloton’s biggest problem with respect to its business model is the upfront cost of its $2,000 bike, along with some supply concerns as result of the pandemic, which has caused some production constraints, though these should ease with the opening of the Taiwan facility. As we look forward to today’s Q2 numbers we’ll get an idea of whether they have got anywhere near halfway to that lofty $3.6bn sales goal.

This morning reports that the EU and UK competition authorities are looking into Nvidia’s $40bn acquisition of ARM, could well see a reaction when US trading opens later today. The probe appears to be in response to concerns on the part of its rivals that the deal would give Nvidia an outsized influence in the chip market.