While US markets ended last week higher, the picture in Europe was markedly different, with the German DAX falling heavily, back towards its 200-day MA, while the FTSE 100 hit a two-month low.
US markets appear to be being propped up by a cohort of the large tech stocks, as well as a resilient pharmaceutical sector, on optimism about a possible vaccine, or vaccines. Attention also remains on Washington DC as US lawmakers continue to haggle over a new Paycheck and unemployment stimulus plan to replace the old one which expired on Friday.
The picture elsewhere for global markets has been much less positive, though we have seen a positive Asia session this morning, with the Nikkei 225 rising over 2%, after a big decline on Friday.
Markets in Europe have seen a more mixed start with the DAX doing well but the FTSE100 slipping into the red, with the banking sector once again coming under pressure after HSBC this morning completed the picture for the UK banking sector, with CFO Euan Stevenson painting a bleak outlook for the UK economy.
HSBC shares fell sharply in Hong Kong trading, as well as hitting 11-year lows here in London, after reporting that it could see up to $13bn in loan losses over the course of the rest of the year. The shares also fell in London trading to their lowest levels since 2009.
The bank increased its provision for credit losses in H1 by $5.7bn to $6.9bn largely as result of uncertainty over the economic outlook and Covid-19. The bank also set aside $1.2bn in respect of software intangibles, mainly in its European operation.
The bank is already undergoing a significant cost cutting plan with 4,000 jobs already cut in the first half alone. Today’s numbers are likely to prompt pressure to speed up this cost cutting plan, with the bank planning to offload at least another 31,000 positions in the weeks and months ahead.
H1 reported profit-after-tax fell 69% from a year ago to $3.1bn, while revenue fell to $26.7bn, despite outperformance in its Global Markets division. Among its weaker markets, revenue fell in wealth management and commercial banking, while the Global Markets division saw revenues rise by 24%. The effect of lower interest rates and flatter yields curves saw net interest margin fall to 1.33% in Q2, from 1.54% in Q1.
The bank also cited concerns over the outlook in Hong Kong and the UK, due to geopolitical uncertainty, while pledging to review the dividend policy at the end of the financial year. Its Hong Kong problems are likely to be particularly acute, as it strives to navigate a tightrope between the US and Chinese governments. There could come a point when it has to decide whether to pivot even more towards Asia, at the expense of its US and UK businesses, if tensions between the US and China continue to persist.
French bank Société Générale this morning became the latest in a long line of banks to post big provisions in respect of impairment charges, reporting a €1.3bn Q2 loss, as well as seeing an 80% revenue decline in its equity trading business, their shares also falling sharply in early trade. While most banks have set aside sums in respect of non-performing loans, Société Générale’s losses have come about as a result of losses at its trading unit. It is the banks second successive quarterly loss and signals that despite numerous banks doing well as a result of the volatility in financial markets, not all banks have done as well.
GlaxoSmithKline reported this morning that it, along with Sanofi is in advanced discussions with the EU to supply up to 300m doses of a possible Covid-19 vaccine. In a setback for cruise ship company Carnival, the company announced that it is having to delay the restart of its AIDA holiday operation. Retail investment trust Hammerson announced that it is in advanced discussions on the terms of a possible disposal of its 50% stake in its VIA outlets business to its joint venture partner APG, as well as considering a possible rights issue. Hammerson owns a number of big retail parks including Bicester Village, Birmingham’s Bullring, Brent Cross shopping centre and Croydon’s Centrale.
Travel company TUI also announced the sale and leaseback of 5 Boeing 737 MAX-8 aircraft for the sum of €193m with BOC Aviation with delivery of the first aircraft expected in the first quarter of 2021. Specialist insurer Hiscox also announced a first-half loss of $139m, with the company setting aside $232m in respect of Covid-19 related claims. Net premiums saw a modest rise in the first half compared to the same period a year ago, rising to $1.328m, with management confirming the cancellation of the dividend, while pledging to restarting it as soon as was practicable.
On the data front we’ve seen the latest European manufacturing PMIs improve further in July with Spain, Italy, France and Germany all seeing decent improvements to 53.5, 51.9, 52.4 and 51 respectively, with Italy seeing its first reading above 50 since August 2018. In the UK, manufacturing activity also improved in July, coming in at 53.3 and its best level since March 2019, with new orders rising for the first time since March, however employment levels have continued to fall.
US markets look set to open on the back foot later today, after big gains last week which were driven by and large by better than expected earnings numbers from the big tech companies. All eyes remain on the bickering politicians in Washington DC and whether they can come to an agreement on a new stimulus package, as a number of US states continue to battel with rising coronavirus cases and deaths.
Microsoft shares are set to be in focus after the company confirmed it was in talks to buy the US operations of TikTok from Chinese technology company ByteDance, which it hopes to conclude by 15 September. The deal could face challenges from President Trump who has said he opposes the idea, however as far as Microsoft is concerned it would be a good way to get into the social media space in a more informal basis. Microsoft already owns professional networking site LinkedIn, but has lagged behind when it comes to more traditional social media.
The latest US manufacturing PMI and ISM manufacturing surveys for July are also expected to see improvements in economic activity with readings of 51.3 and 53.5 respectively. In terms of the surveys the ISM will be the more closely analysed of the two, with the latest employment component likely to be analysed closely ahead of this week’s July payrolls report.