European stocks have started the week on a softer note after the decent gains seen over the past few days, as concerns over even tighter restrictions prompt some profit taking.
There’s also been a lot of talk, after the record highs of last week in the US, and in German stocks, that equity markets are looking rather frothy, however this is hardly anything new; they’ve been frothy for a while, some more than others. That doesn’t necessarily mean that we’re about to see a sharp sell-off, and even if they are a little overvalued, that doesn’t mean we can’t continue to move higher, in the short- to medium-term. Bond yields, despite last week’s move above 1% in the US 10-year are still very low, which means in the absence of a viable alternative stocks still look attractive, despite today’s weakness.
One other reason for the slightly weaker start to proceedings is an increase in coronavirus cases in China, which has thus far managed to avoid a second wave of infections, and where the economy is looking fairly resilient. If the virus regains a foothold here, as Chinese authorities impose new regional restrictions, that could well act as a brake on recent economic activity.
Friday’s US non-farm payrolls report underscored the challenges facing the new Biden administration when it comes to supporting the US economy, after the loss of 140,000 jobs in December. This poor number, along with the -123,000 from the ADP payrolls report, has shown that while the US economy is showing some decent figures on a number of levels, it still remains 11m jobs shy of where it was a year ago.
As a result, it sets us up for a huge fight in the Senate in respect of how big any new fiscal stimulus plan is likely to be when Biden takes up the reins of power on 20 January. The president-elect is set to announce his proposals for the US economy later this week, and while they are expected to be more expansive than Republican plans, there is no guarantee they will be anywhere near as large as outlined in the Democrats $3.4trn manifesto from last year. This is because, despite the Democrats regaining nominal control of the Senate, not all in the party are fiscal doves, with some leaning towards the hawkish side.
After last week’s retail updates, came in slightly better than expected due to higher online volumes, JD Sports has continued the theme today, with an update on its own Christmas trading, which sent the shares to a record high in early trade this morning. Total revenues for the 22-week period through November and December, when most of its high street space was closed, showed a rise of 5%, as digital channels took up the slack. Despite the challenges in closing stores at short notice, management have said they expect that full-year profits to come in at £400m, ahead of market expectations of £295m, while guidance for the next fiscal year is an expectation of a rise of 5% to 10% rise in headline profits, albeit with uncertainty around the outlook with respect to the length of time its high street stores are likely to remain closed.
The stress on the retail sector is outlined in today’s update from commercial property owner British Land, with the shares lower in early trading, as its retail tenants struggle to meet their rents due to the various lockdowns over the last 10 months, which has seen their cash flows impacted due to lower footfall. For December the company said it has collected 71% of the total rent due at £86m, with open air retail parks playing an important role in keeping the revenues coming in for its retail space, however this still only accounted for 46% of the total in this sector. Rent due from its office space was much more resilient with 95% received for December, and high amounts for previous months, however it is its retail real estate where the pinch is really being felt, with the highest deferrals in the first lockdown from last year, at 27%. This would suggest that Q4 is likely to be similarly high given that the current lockdown is unlikely to be relaxed much before Easter.
Outsourcing company Capita has formally signed its new £1bn contract over 12 years to deliver Royal Navy training, at a number of sites across the UK. Entain CEO Shay Segev has given notice of his intention to leave the company only days after the business rejected an £8bn takeover offer from MGM.
The US dollar has continued its rebound from last week’s lows, helped by the rise in US yields, as markets start to price in the prospect of higher fiscal stimulus over the course of the next few weeks. Does this mean we’ve seen the lows for the greenback? For now, it’s too early to say, however the reaction of last week’s lows suggests the prospect for further gains as short positions get squeezed. The slightly softer tone for equity markets is also manifesting itself in the crude oil market, with modest losses here this morning, with concerns about rising coronavirus cases in China tempering recent gains.
Bitcoin’s recent surge higher appears to have lost momentum after last week’s record highs, dropping sharply over the weekend, on profit taking. Even with the weekend losses the asset is still well above the levels we saw less than a month ago, when it broke above $20,000 on 16 December.
US markets also look set to open a little lower after last week’s outperformance, saw new record highs across the board. Boeing shares could well be in focus after the weekend crash involving a 737-500 aircraft in Indonesia. While the plane in question isn’t a 737 MAX, the accident once again casts a shadow over the company’s brand, which has taken an absolute battering in recent times.
Social media stocks could also face further selling pressure, as attention turns to future regulation in a sector that isn’t particulary popular with politicians on both sides of the political divide in light of recent events. Twitter saw losses on Friday after it suspended President Trump from its platform, in a move designed perhaps to head off potential future regulatory moves against it, however this could well be a case of too little too late, with its shares down sharply in the pre-market trading already. The same is likely to apply to Facebook, which has come under significant amounts of criticism for also not banning the outgoing president sooner.
These moves, whether you consider them justified or not, could see them lose further users if they become seen as arbiters of what is considered politically correct or acceptable. Whichever way you look at it, the honeymoon could be over this particular part of the market as a Biden administration gets its feet under the table over the next four years.