The meltdown in oil markets has continued overnight with another big decline in Brent prices as they play catch up with the US WTI contract to hit their lowest levels in over 20 years. The slide in oil prices also infected equity market sentiment yesterday with US markets posting their biggest one-day decline since the beginning of this month.
Asia markets have traded in a much more mixed fashion, despite the passing of another US fiscal stimulus bill of $484bn in the Senate last night.
Despite the declines in the US and Asia markets here in Europe have opened higher this morning, though after the big moves of the last couple of days this probably shouldn’t be too much of a surprise, with last night’s new US stimulus package helping to provide an uplift.
All the while OPEC+ members have continued to procrastinate about what to do next, when it is quite apparent that only large-scale reductions in output can help to stem the bleeding. This bleeding is precisely what is happening now, as oil producers feel the pain of huge losses as a result of breakeven prices that are well above current levels.
With no sign that global demand is likely to pick up any time soon the situation is only likely to become more acute. We have already seen one oil contract trade in negative territory, and it is becoming much more likely that it could be the first of many unless some sort of action is taken.
The problem in the US is particularly acute given the lack of storage capacity, and here the procrastination is even worse when it comes to production cuts, even though the storage problem is even more acute.
At least with Brent crude, producers can rent tankers to store their surplus, however even here the cost is sky rocketing as tanker owners realise that they have preciously diminishing capacity, and can almost name their price.
Last week, in a sign that US banks were gearing up for a big increase in loan losses, due to the sharp rise in unemployment, they set aside billions of US dollars to build a buffer for the upcoming tsunami of defaults about to come their way.
In a sign that the European Central Bank is also concerned about this, officials called for the creation of a European bad bank earlier this week, in order to help deal with the same problem for a European banking sector that is already well behind the curve in dealing with its own bad loans problem. While some progress has been made in terms of dealing with bad loans in Europe, the levels are still well above average, particularly in Spain and Italy where the shutdowns in the economy have made an acute problem even worse.
This morning, Italy’s largest bank Unicredit took the first steps to dealing with the problem of bad loans on its books by taking a €900m loan loss provision in Q1, and they probably won’t be the last. The bank also said they expected to see the economy in Europe decline by 13% in 2020, with a strong rebound in 2021.
In a sign that the lockdown is also impacting beer consumption Dutch brewer Heineken announced that Q1 beer volume was down by 2.1%, with further significant impacts expected in the second half of this year as well. The company has also said it would not be paying an interim dividend, while bonuses for senior managers would be cancelled, despite the company posting net profits of €94m.
Irish building materials company CRH has seen its shares rise on the open after the company reported that like for like sales rose 3% in Q1. The company has implemented temporary layoffs of some of its employees, while cutting management salaries by 25%. Management have said the company remains in a strong cash position with up to $6bn in liquidity. The decision to suspend the share buyback program isn’t a surprise, however the decision to propose a final dividend may well raise a few eyebrows, given the reluctance to provide any guidance, due to the ongoing uncertainty over Covid-19.
UK drinks maker Fevertree has also seen an impact from the lockdown on its trading activities, however to date they appear to have been modest, with preliminary full year revenue coming in at £260.5m, at the bottom end of market expectations, but still 10% higher from a year ago. It would appear that home consumption has seen an increase as householders self-medicate to get through the lockdown, so to speak. Profits after tax came in at £58.5m, a decline of 5% from a year ago, while margins slipped slightly to 50.5%. the company did warn that the company would face challenges through the rest of the year, but for now remained committed to paying the dividend in August. In the current year to date, group trading in the first two months has been steady.
Online retailer Boohoo.com has said it won’t be providing guidance for the rest of the year, as it announced its full year results for the year ended February 2020. Group revenues showed a rise of 44% to £1.235bn, with profits before tax rising 54% to £92.2m. Revenues saw decent increases across all of its brands, while the NastyGal brand saw a 106% rise to £98.8m. The bulk of revenues still come through the Boohoo and PrettyLittleThing parts of the business.
The acquisition of the Karen Millen and Coast brands appear to have complemented the growth in the business with minimal impact on the firms profit margins, though we have still seen a modest decline in those margins across all of its brands.
US markets look set to open higher this morning in the wake of Senate approval of a new $484bn stimulus plan.
Not unexpectedly Netflix latest numbers saw subscriber growth surge in Q1, with 15.8m new subscribers, easily beating its estimates of just over 7m. Revenues also improved coming in at $5.77bn, as the company posted its best ever numbers. What was slightly more concerning was that profits fell slightly short of expectations, which suggests that costs went up significantly in the past three months, though the strength of the US dollar may well have also played a part.
Netflix’s biggest problem now is how many of these subscribers stick around once the lockdown is lifted, as well as concerns about their content pipeline, which is suspended due to the lockdown restrictions. Fortunately, this problem isn’t just unique to them so I’m not sure it’s as big a concern as people think it is. Sharp contractions in consumer incomes are more likely to affect Netflix as consumers become more discerning about content providers, given they are currently the most expensive option when compared to Amazon Prime and Disney+
United Airlines is also set to be in focus after the company announced it was looking to sell more than 39m shares worth around $1bn to shore up its balance sheet, on top of the federal aid it received earlier this month so that it could keep paying its staff.