The FTSE 100 had another strong day yesterday, outperforming its European counterparts as optimism over vaccine approval, as well as a Brexit deal, gave a broad lift to UK assets.
US markets had a somewhat mixed session, slipping back from intraday peaks on reports of supply chain issues at Pfizer, with respect to the new vaccine. This seems a little bit of an overreaction given that supply chain issues tend to be temporary in nature, and generally easily resolvable. Asia markets have finished another positive week, slightly on the back foot, but nonetheless the mood in Asia is much more upbeat than it was a couple of weeks ago, especially with the Chinese economy continuing to maintain its recent momentum.
Markets in Europe got off to a mixed start, with the FTSE 100 once again outperforming, trading above the 6,500 level for the first time since 6 March, with oil and gas and consumer goods sectors helping drive the rebound.
With US policymakers once again engaged in discussions over a possible stimulus deal, markets are again being buffeted by headlines about the restarting of talks between US treasury secretary, Steve Mnuchin, house leader Nancy Pelosi, and Senate majority leader Mitch McConnell At the risk of becoming headline weary, with this particular to and fro a regular feature since July, it does appear that the various parties do seem more open to compromise. A bipartisan proposal of a $908bn stimulus package appears to have much broader support, given recent increases in weekly jobless claims, however the prospect of a deal is still some way away. This is because Mitch McConnell, who is leader of the Senate Republicans, still seems wedded to his pre-election commitment of a $500bn package. It is important not to underestimate how important these talks are given that in the absence of a deal by year end, 12m Americans will lose their unemployment benefits, with all of the attendant risks that could spell for the US economy.
The main concern among some is complacency among many on Capitol Hill, given the rebound in the US labour market since the big spring lockdown. Since April, the US unemployment rate has fallen from its peaks of 14.7%, to 6.9% in October, and could fall further when the November numbers are released later today. Weekly jobless claims had until two weeks ago continued to decline, however they have now started to rise again from a low of 711,000 to 778,000 last week, and though we did fall back to 712,000 yesterday, this may have had more to do with the Thanksgiving break than any discernible trend change.
This recent rise in the claim’s numbers, along with all small pockets of weakness, is raising concerns that the recovery could start to stall. This week’s ISM surveys, while resilient, did show that the employment components were a little lacklustre. A positive factor around the October numbers was a rise in the participation rate to 61.7%, which suggests more workers are returning to the jobs market, however this can’t disguise the fact that the participation rate is still below the 63.4% level it was in February, but at least it now appears to be heading back up again. Despite the resilience of the US labour market, the fact remains that over 9m more Americans are still out of work compared to the beginning of the year. Today's non-farm payrolls report is expected to see another 475,000 jobs added to the 638,000 in October, however the gains seen in the past six months still remain some way short of the 21.5m jobs lost in March and April.
In company news, SSE has announced the sale of a 10% stake in its Dogger bank wind farm for £202.5m to ENI, and will use the proceeds to invest in new low carbon opportunities. Other wind farms under construction include Seagreen offshore wind, and the Viking wind farm in Shetland, which is due to be completed in 2024.
Commercial property valuations have taken a hammering over the last six months, as businesses contend with a new working from home culture. In a sign of the strain on the balance sheet of commercial property owners, Land Securities this morning announced the sale of 1&2 Ludgate for £552m to Sun Venture. Completion of the deal is set to conclude by year end and the proceeds are expected to be used to pare down debt. The stamp duty holiday announced by the chancellor earlier this year has seen house prices rise sharply over the last few months, with housebuilders feeling the benefits of that decision, with a surge in viewings for more out of town locations.
Berkeley Group’s first-half update showed profit-before-tax fell 16.6% to £230.8m, slightly below expectations of £240m, with expectations that the second half of the year should see this increase to £500m. There is little doubt that the disruption in late March and April has seen its cost base increase to make its sites Covid-secure, and this has also seen revenue slip back to £859.9m, as fewer homes were delivered. The company delivered 1,104 new homes, down from 1,389 a year ago, however the average selling price was higher at £799,000. Forward sales, on the other hand, look strong, rising by £79m since April to £1.94bn.
Associated British Foods has also dropped in an update on trading as a result of the recent lockdown in November. Estimates for loss of sales at Primark is estimated at £430m, however given the limited reopening in December there could be some pre-Christmas clawback of some of this. All the other areas of the business; grocery, agriculture and sugar, are all said to be trading in line, or ahead of expectations.
Cineworld shares have plunged from their highest levels in six months, after Warner Brothers announced that it would be releasing next year's film slate straight to streaming at the same time as releasing them to cinemas. While this only affects its content in the US, with the films being released to HBO Max, the direction of travel is clear, and could spell the end of some of its cinema real estate, as being unviable, particularly since it has over £6bn in debt already. The news that AMC Entertainment, who own the Odeon cinema group, has said it will need to raise extra cash in order to get through the winter hasn’t helped either. AMC said it needs to raise another $844m by selling new shares, diluting shareholders holdings in the process.
Brexit talks are once again veering between optimism and pessimism as the discussions head into their final phase. The main priority now is for there to be as little disruption as possible at the end of the month when the transition period comes to an end. Hopefully we’ll have a better idea of where we are by next week, though the main risk remains over a misjudgment of how much either side can move and we get a no-deal by mistake. France appears to be playing a dangerous game, given that in the absence of a deal French fishermen would lose their current legal rights to enter UK waters, however it is also important to understand that a lot of these verbals are largely due for domestic consumption.
The current upbeat mood in markets is having a significantly negative effect on the US dollar, with the pound at its highest levels this year, while the euro has moved through 1.2100, and in the process given the ECB an enormous headache for when it meets next week. A high euro has an enormous deflationary drag on the central bank's ability to hit its inflation target, and the single currency is already nearly 9% higher year-to-date.
US markets look set to open higher, despite yesterday’s late pullback, with the November non-farm payrolls report the main focus of attention. Irrespective of whether the report is a good or bad number, attention is likely to be more focused on events on Capitol Hill than the numbers themselves. We also have the latest Canada jobs report, which is expected to see 20,000 new jobs added in November, down from 836,000 in October.
Boeing shares are likely to continue to be in focus after yesterday’s gains and the deal with Ryanair to sell 75 new 737 MAX aircraft. This comes across as a risky play by Ryanair given the bad publicity surrounding the MAX, as well as a rapid return to normal post-pandemic vaccine. Demand may well take longer than anticipated to recover.