Stock markets in Europe are deep in the red as we approach the last trading day of what has been a quiet week.
Europe
President-elect, Joe Biden, announced overnight a $1.9 trillion coronavirus relief package – which was at the upper end of forecasts. The long-awaited announcement was the highlight of the week. Sentiment in stocks has slipped since the update was delivered as traders are content to book profit from recent gains. Last week, the FTSE 100 and the CAC 40 set multi-month highs, while the DAX 30 notched up a record high. Much of the gains that there achieved recently were in anticipation of Biden’s stimulus announcement. Lofty equity valuations combined with concerns that countries are going to extend their lockdowns have encouraged traders to exit the market. Pfizer said the rolling out of its vaccine in Europe will be slowed in the near-term as the pharma giant upgrades its production facility, the news is playing into the bearish move too.
Aveva shares hit their highest level since October on the back of its positive trading update. The company provides software solutions for industrial companies. In the nine months until the end of 2020, revenue edged up by 1.5%. The company is getting a lot of repeat business as recurring revenue rose by 10%, which accounted for 68% of total revenue. The continued digitalisation of industry has put Aveva in a good position in terms of future demand. It is confident in its full year outlook.
Segro, the warehousing specialist, confirmed it collected 98% of the rent that it was due for the year. In addition to that, it has already received 88% of the £63 million rent that is due in the first quarter. The group has a lot of online retailers as clients so it is not under pressure like British Land or Land Securities, who has large exposure to high street assets.
Babcock International shares sold off aggressively today as there are concerns the company’s cash flow might be impacted as it is carrying out a review in the profitability of its contracts. Seeing as the group cautioned about an uncertain outlook and they still haven’t issued a guidance, traders took that as a sign that negative news could be in the pipeline. Babcock’s civil aviation business has been hit hard due to the pandemic but its defence unit is picking up some of the slack. Trading in the third quarter was in line with what was experienced in the first half. Revenue for the first nine months fell by 4.89% to £3.39 billion. On the bright side, the order book is up £3.1 billion to £16.8 billion on a year-to-date basis, while the total level for last year was £17.6 billion. Adding to the downward pressure on the stock were the price downgrades from JPMorgan and Jefferies.
Meggitt, specialises in providing sub-systems and components for the aerospace sector, so it also suffered greatly on account of the health crisis. Today’s full year trading update was well received. The group expects full year operating profit to be in the middle of the £180-£200 million range, which was unchanged from the update in November. Last year’s statutory operating profit was £325 million. Annual revenue was £1.7 billion, which was a sharp fall from the £2.27 billion posted last year. The group is optimistic that demand for flights will pick in the months ahead as vaccines get rolled out, so that should help their business.
The Serious Fraud Office launched an investigation into British American Tobacco in 2017. It related to suspicions of corruption being carried out, but today the body announced the investigation had come to an end with no charges being brought against the tobacco giant.
The lockdown has rattled Gym Group as full year revenue was £80.5 million, down from £153.1 million last year.
US
Stocks are in the red as dealers are cutting back on their equity positions now that Biden’s relief package has been announced. It is a little worrying that retail sales fell by 0.7% in December, the all-important shopping month. The November metric was revised from -1.1% to -1.4%. In addition to that, the New York Fed manufacturing reading for January was 3 5, the lowest in seven months. Lately there has been growing evidence the US economy is cooling and today’s reports adds weight to that view.
JPMorgan kicked off the reporting season for the major banks and the fourth quarter numbers were impressive. EPS was $3.79, which easily beat the $2.62 consensus estimate. Revenue for the period was $30.16 billion, topping the $28.7 billion estimate. Investment banking revenue rose by 37%. Trading revenue increased by 20%, while net interest income slipped by 7% - which was hardly a surprise in light of the depressed interest rate environment. JPMorgan released $2.9 billion in credit reserves - it suggests the losses anticipated from bad debts won’t be as bad as initially predicted.
Citigroup posted respectable quarterly numbers too. EPS was $2.08, which comfortably beat the $1.34 forecast. Revenue dropped by 10% to $16.5 billion, narrowly undershooting the $16.7 billion forecast. The bank released $1.5 billion in reserves for credit losses.
Exxon Mobil shares are in the red as the Securities and Exchange Commission is carrying out an investigation into the valuation of an important asset in Permian Basis, a whistle-blower claimed the asset is overvalued.
FX
The US dollar index is higher as the traders are in risk-off mode. Stocks are in the red across the board so assets that are considered to be lower risk, such as the US dollar, are in demand. Yesterday, the greenback was pushed into the red when Jerome Powell, the head of the Fed, said it is not the time to discuss reducing the size of the bond buying scheme, so the dollar was relatively weak when today’s session started. The move higher in the greenback pushed GBP/USD and EUR/USD into the red.
In November, the UK economy contracted by 2.6% on a month on month basis, economists were expecting a fall of 5.7%. The October reading was revised up from 0.4% to 0.6%, so it was a double victory for British growth. It was reported the services sector saw negative growth of 3.4%, which was painful but far better than the -6.7% reading consensus estimate.
The boarder bearish sentiment has dented the CMC AUD index as well as the CMC CAD index as commodities in are the red.
Commodities
The move higher in the US dollar has weighed on gold. Historically, the commodity has benefitted from flight to quality flows but the inverse relationship with the dollar is acting as a counteracting force.
Brent crude oil and WTI are in the red as the wider bearish sentiment in the markets has applied pressure to the energy contracts. China’s growing health crisis has led to a fall in oil as it is the largest importer of energy in the world. The Beijing administration has put 22 million people on lockdown due to rising Covid-19 cases, so demand fears are in circulation.
