22-6-2020 10:22:0522-6-2020 10:11:07Europe

Equity markets are being influenced by oil again, as the move higher in the energy has made dealers more optimistic in their outlook. At the start of the week, sentiment was sour as there were fears that global demand was going to fall off a cliff, but thanks to the recovery in the oil market, those fears have dissipated. Stocks are showing decent gains as we approach the close of business.

Like yesterday, Royal Dutch Shell and BP are higher due to the rally in oil. Mining stocks like Glencore and BHP Group are up due to a move positive in the metals market. Anglo American are higher too even though the firm lowered its guidance as production fell.  

The latest manufacturing and services data from the eurozone and the UK were appalling – record low rates of activity. The announcements initially caused stocks to trade lower, but the bullish run in oil overshadowed the figures. Also, some countries are relaxing their restrictions, so traders are taking the view that economic activity should tick-up in the months ahead. A number of big UK firms have announced plans to re-start operations.

Vistry shares are in demand today after the house builder said that work will recommence next week. The firm announced that roughly 90% of its partnership sites will see a return to activity, and so will a ‘significant’ number of their own sites. Traders reacted well to the news as it signals a return to normality Work will be focused on projects that are near completion so the properties can be sold, and that will help with cash flow. The vast majority of workers have been furloughed, but that is expected to change once sites re-open. Vistry are in a strong position in terms of liquidity as it has access to a £770 million banking facility, plus it expects to receive £40 million in the next two weeks from work it completed last month.  

It is a similar story with Taylor Wimpey, who will embark on a phased return to work in early next month. The house builder continues to sell properties online, so demand is clearly still strong despite the current economic climate. Even though sites as well as sales centres have been closed because of the health crisis, cancellations are only 0.8% of the order book – another indication that demand is robust. Sales and office staff will continue to work remotely during the phased recommencement of construction activity, and site workers will adhere to strict health and safety guidelines. The group has £838 million in cash, and it has access to the Covid Corporate Finance Facility (CCFF), subject to documentation. The stock is up 11.7%.

Meggitt revealed a 5% rise in first quarter organic revenue. The defence division outperformed as it saw a 15% jump in revenue, and the outlook for the unit is positive. Keep in mind, the defence operation accounted for 36% of total revenue last year. The company will go down the cost cutting route as a consequence of the pandemic. The workforce will be reduced by 15%, furlough schemes will be accessed, and a hiring freeze has been implemented. The CEO, the CFO and some senior management will take a 20% pay cut. The final dividend has been cancelled. Meggitt predicts the cost saving measures should save the company £400-£450 million. It’s liquidity position is strong as it has a banking facility of £1.67 billion, which provides headroom of £668 million. In addition to that, it can tap into the CCFF. No guidance was offered.   

Other companies are going back to business too. B&Q have taken the decision to reopen more than 60 stores. The DIY group will introduce social distancing controls to ensure the health and safety of its staff and customers. B&Q is a part of the Kingfisher group. Aston Martin confirmed that operations at its Athan plant will resume on 5 May. The luxury car manufacturer confirmed there will be pay cuts for senior management.  

The UK regulator, the Competition and Markets Authority (CMA), have approved the £6.2 billion merger between Just Eat and Takeaway.com. The body said there were no competition concerns. The company confirmed that it raised €700 million via a share offering plus the issuance of convertible bonds. Some of the proceeds will be used to pay down debt. The group might have tougher competition on its hands as last week the CMA provisionally approved Amazon’s $575 million investment in Deliveroo. Food delivery services have been one of the few businesses to see an increase in activity during the health emergency as the lockdowns prompted a rise in takeaway orders.

Deutsche Bank cut it’s price target for Legal and General from 335p to 295p.

Drax shares have been hit as HSBC cut its price target to 310p from 375p.

US

The S&P 500 is pushing higher as traders across the pond are also a little more positive in their outlook. The violent declines suffered in oil recently sparked concerns that we could be in for a bout of deflation, but the turnaround in the energy has pushed those fears to one side. Marathon Oil, Chevron and Halliburton are up on the day thanks to the surge in WTI.  

The US labour market has taken another knock as the jobless claims report came in at 4.42 million, economists were expecting 4.2 million. Last week’s reading was revised fractionally lower to 5.23 million. In the past five weeks, roughly 26 million people have signed up for unemployment benefit – this has essentially wiped out all the jobs that were added post the credit crisis era of 2008/09. On the bright side, the rate of new jobless claims has fallen in the past two week.

The flash reading for services and manufacturing came in at 27 and 36.9 respectively, and keep in mind that economists were anticipating 31.5 and 38 respectively.  

Target have seen a surge in online sales on account of the coronavirus crisis. The group offers a couple of different options for digital sales, as some customers select the delivery option, while others prefer to click and collect option. In the three month period same-store-sales increased by over 7%. So far in April, online sales are up 275% on the year. The pandemic is having a negative impact on the company too. Higher staffing costs, an increase in expenses relating to employees wellbeing, and inventory write-downs will eat into profits. The group didn’t offer a guidance with regards earnings.  

Eli Lilly posted healthy first quarter figures as people stocked up on medication and treatments amid the health crisis. Revenue jumped 15% to $5.86 billion, topping the $5.51 billion forecast. Trulicity, a treatment for type 2 diabetes, outperformed as revenue surged by 40%. EPS came in at $1.75, and the consensus estimate was $1.48. The group’s full year EPS guidance is now $6.70-$6.90 – the top end was raised by $0.10 - and equity analysts were predicting $6.74.

FX

The CMC EUR Index is under pressure today on account of the dismal flash PMI reports form France and Germany this morning. The French services reading slumped from 29 in March to 10.4 in April, the shocking update set the tone for the other reports that were to come. The German services reading for April was 15.9, which was a big drop from the 34.5 recorded in March. The manufacturing sector is a vital part of Germany’s economy, and the level dropped from 45.7 in March to 34.4 in April. Germany and France are the two largest economies in the eurozone. If they are enduring a collapse in economic activity, Spain and Italy are possibly in an even worse position seeing has they have been hit harder by the Covid-19 crisis.

Sterling is holding up well considering the awful economic updates from the UK today. The flash services PMI and flash manufacturing PMI reports came in at 12.3 and 32.9 respectively. The final reading of the March services report was 35.7, so today’s flash report points to colossal fall in output. The services sector accounts for approximately 80% of the UK’s economic output, so the impact will be very painful.

Like yesterday, the ‘commodity currencies - the Australian dollar and the Canadian dollar, are in demand because of the rebound in metals and oil.  

The Japanese Yen is weaker this afternoon on the back of a report the Bank of Japan (BoJ) will double its corporate bond purchases. In addition to that, the BoJ, will discuss the possibility of unlimited bond buying at their next meeting.

The US dollar index was sent into the red this afternoon after the Small Business Administration issued new guidelines making to tougher for big firms to access government loans.   

Commodities

WTI and Brent crude built on yesterday’s gains. Political tensions between the US and Iran have ticked up after President Trump warned that if any Iranian gunboats ‘harass’ US ships, they will be destroyed by the US Navy. The Iranian government hit back at Washington DC by stating they will target any ship threatening its security.

 Mr Trump has wanted to see higher oil prices for a while, and it seems like the warning has done the job. OPEC+ recently agreed to a historic production cut, but there is talk of further cuts. Worries about demand as well as insufficient storage capacity, might encourage oil producing nations to sign up for extra output cuts. Oklahoma’s energy regulator said it would allow oil producers to close their wells without risk of losing their leases – this my might the pave for way for lower production.    

Gold is higher again today as the metal continues the bullish trend that it has been in since mid-March. The metal’s upward move has been heled by the recently dip in the US dollar. If gold can hold above $1,700, it might retest the highs of the month.