This week’s optimism over the new and relatively cheap coronavirus treatment, Dexamethasone, appears to be giving way to some concern that the reporting of new cases of the virus, across the world, could mean the economic rebound currently being priced in finds itself stuck in the mud, in the weeks and months ahead.

For all the optimism that central bank and government stimulus will help alleviate more permanent economic scarring, there is rising concern that any recovery is likely to be less V-shaped and more a long U-shaped type of rebound, as new cases start to rise in China, and rising infection rates in the US prompt concern about the reopening of the economy there.

Asia markets have slipped back this morning on the back of these concerns and as such European markets have followed suit, opening modestly lower, though we still remain higher on the week. In Australia, the unemployment rate surged to 7.1% from 6.4% in the previous month, as jobs lost in May surged by another 227,000 on top of the 607,000 lost in April, sending the Australian dollar lower on the day.

This week oil giant BP announced it would be taking charges of up to $17bn as it lowered its longer-term price assumptions on oil and gas prices for the period from 2021-2050, as it adjusted its expectations on returns related to future capex. Yesterday the company raised $12bn in corporate debt, taking advantage of the low borrowing costs in US dollar, sterling and euro credit markets, as it took steps to bolster its balance sheet for the challenges ahead.

Tesco appears to have called time on one part of its Central Europe operation, which combines Poland, Hungary, Slovakia and the Czech Republic, and decided to offload the Polish part of the business to Salling Group A/S for the sum of £181m, ahead of next week’s Q1 trading update. In its last set of full-year numbers, the business in Central Europe saw a 12% decline in sales, and a 29.4% decline in profits, with a large part of that down to a £220m writedown, in respect of its Polish business.  

UK housebuilder Taylor Wimpey this morning announced the results of its recent share placing, raising £520m at a price of 145p, placing 355m new shares, as it looks to acquire more land at lower prices. Yesterday’s announcement that the company was looking to raise extra funds caught a lot of people by surprise, however management seem keen to avail themselves of a recent fall in land prices, in expectation of a pickup in the housing market a few years down the line.

National Grid also announced its latest full-year numbers, and despite a fall in pre-tax profit of 5% to £1.75bn, the company increased its dividend by 2.6% to 48.57p a share. A large part of the decline was down to a £117m provision in respect of US bad debts. In terms of Covid-19, the company has assumed a £400m impact on its profits for the fiscal year 2021.

When Ted Baker announced at the beginning of this month it was looking to raise over £100m at a discounted price of 75p, the share price tumbled, as new management looked to rescue a business that has seen its fortunes implode spectacularly in recent years. In March 2018 the shares were up at over £30 each, however a raft of profit warnings, the departure of founder Ray Kelvin in controversial circumstances, and various stock accounting errors, has seen the shares fall sharply, to their current levels, now just over 110p. This morning the company announced it had raised another £105m at the discounted price of 75p.

Earlier this year, the company sold and leased back its head office in London for the sum of £78.75m, with £72m of that cash used to pay down debts. The company has an uphill struggle in the current retail environment, however underlying profits in its last fiscal year did come in at £4.8m, despite the various writedowns, while total revenue fell 1.4% to £630.5m. Gross margins are also above 50% at 55.6% as per its last annual report. On the plus side, its store footprint is narrower than some of its peers, and the business rates holiday will also help on the margins, although that won’t help much if consumers stop spending.

Six weeks ago, the Bank of England painted a picture of a V-shaped recovery for the UK economy as the country grapples with the consequences of an extended lockdown. Its projection that the economy was likely to contract by 25% in Q2 may well prove to be accurate, however its optimism that there will be a quick rebound was widely questioned, as it predicted a rapid rebound in economic activity in 2021. This looks rather doubtful as do a lot of the predictions of a V-shaped recovery elsewhere across the world.

Since the bank initiated its £200bn QE programme in March, there has been speculation that the central bank will add to that total, starting with today’s meeting, given that in May two MPC members, Jonathan Haskel and Michael Saunders, voted for an increase, and the current programme will be completed next month. The only question remains over the amount of QE, which could range from anything from £100bn to an extra £200bn. An extra £100bn is already priced in, and with the European Central Bank, as well as the Federal Reserve, both recently doubling down on their own stimulus measures, the Bank of England could go further, especially in respect of corporate bond buying, which in the overall scheme of things has been fairly modest.

Rates are expected to remain unchanged, and while we can expect to see some questions on negative rates, the bar to this remains very high given recent comments from deputy governor, Jon Cunliffe, as well as concern that such a move could cause irreparable damage to the UK banking sector. The pound is slightly weaker ahead of this afternoon's central bank announcement on expectations that we might see a much more dovish outlook. The Swiss National Bank left rates unchanged, saying that they expected the economy to rebound 3% in 2021, and any recovery in economic activity was likely to be slow.

US markets look set to take their cues from today’s weaker Asia and European sessions, and open slightly lower, with the main focus once again set to be on the labour market and the latest jobless claims numbers, as the US economy continues down the road on its reopening process.

Weekly jobless claims are expected to continue their downward path, with another 1.3m new claims, down from last week’s 1.54m. The number of continuing claims will also be closely monitored for further signs of a reduction, having peaked at over 25m in early May there is rising optimism that it could fall below the 20m mark for the first time since the end of March, with a fall of 1m expected from last week’s 20.9m to 19.85m.

US oil company Chevron is in focus as it begins the sale process of its stake in its North West shelf LNG stake. Bankrupt rental car company Hertz has abandoned plans to try and raise $500m after US securities regulators stepped in, over concern over the recent surge in the share price. This surge had been prompted by retail buying in anticipation of a rescue, however any restructuring could well leave these shareholders, and new ones seriously out of pocket.

One of the biggest grocers in the US, Kroger is one stock that has had a good 2020 so far. Like most food retailers it has remained open, helping keep US consumers fed. At its most recent earnings announcement it maintained its forecast for 2020, boosted by sales of its own high margin private label brands, which saw the company post annual sales of $23.1bn in 2019. The recent deal with Ocado has seen the business look to improve its digital presence in a market that currently has Walmart as the market leader and which Amazon is also making its presence felt. The deal with Ocado appears to be going from strength to strength with plans to build more highly automated customer fulfilment centres. So far plans have been announced for the building of 9, of which the first should be finished in Ohio in early 2021.

Expectations are for Q1 earnings to come in at $1 a share, however as we have seen with recent updates from Walmart and Target, we could well see margins hit by higher costs as a result of Covid-19 contingency measures.

 

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