Friday’s rebound in US markets wasn’t enough to prevent global markets slipping to their first weekly decline in a month, amidst a concern that a second wave of infections could derail hopes that the global economy might see a v-shaped recovery.
A rise in the infection rate across a number of US states, as well as a bleak prognosis of the US labour market by Fed chair Powell was amongst the main catalyst for this concern.
These concerns have been amplified over the weekend after reports from the Chinese capital, Beijing that has seen a surge of new coronavirus cases across a number of districts, prompting a lockdown of the affected areas. This in turn has increased fears that the slow improvement in Chinese economic data that we’ve seen in the last couple of months, may well suffer a fresh setback.
Since lockdown measures were eased in March, Chinese consumers have proved to be somewhat reluctant to go out and spend, with retail sales since then well below the levels of last year. At this time last year retail sales were rising at an average 8% year on year. Contrast that to this year and we’ve seen four monthly declines in a row, with the latest retail sales for May coming in this morning at -2.8%.
While these numbers have slowly improved from the over 20% decline seen in February, they speak to a marked reluctance by Chinese consumers to unlock the purse strings, which if repeated across the world is likely to see a similarly slow and protracted rebound. This is in stark contrast to the v-shaped rebound being modelled by a lot of economists and analysts, and as such perhaps helps explain why financial markets are so nervous as we start a new week very much on the back foot.
With new coronavirus cases also seeing increases in India and Japan, as well as the US, with record rises in Florida and Texas, markets have started the new week trading sharply lower, with sharp falls in Asia, and today’s European session posting their lowest levels this month, with the DAX and FTSE 100 back at levels last seen in the final week of May.
With economies across Europe also starting their own re-opening processes, markets now look to be much more focussed on the risk of a rise in re-infection rates, and a second wave, as countries try to go back to some semblance of normal.
Early trading has seen the oil and gas and basic resource sectors lead the losses, with the FTSE100 back below the 6,000 level, over 500 points lower from where it was a week ago today when it briefly traded at a high of 6,511.
Last week BP announced that they would be cutting 10,000 jobs across the business as the company looked to bolster its balance sheet, against a backdrop of a sharp drop in global demand, and lower energy prices.
This morning the company went further and as part of a long term review of its global business, announced it would be taking a number of charges in Q2, estimated to be in the region of between $13bn to $17bn, as management revised lower their long-term price assumptions for oil and gas prices over the period from 2021- 2050.
More details on the range of measures are expected to be provided on the 4th August when BP unveils its Q2 numbers, as the company strives to make itself fit for a new lower carbon economy, as part of a new long-term strategic carbon neutral plan. Something like this has been long overdue from BP, already paying a dividend that has been unsustainable for several years, and with a debt level that is already too high, the company now faces any number of unpalatable choices.
Having seen its sector peer Royal Dutch Shell bite the bullet and cut its dividend a few weeks ago, it would appear that BP is likely to have to follow suit, if it wants to reduce its already high debt levels and shore up its balance sheet for the new challenges ahead.
AstraZeneca shares are also higher/ lower on the back of weekend news that the company has reached an agreement with Europe’s Inclusive Vaccines alliance to supply 400m doses of a Covid-19 vaccine. Testing of the vaccine began in April and it is hoped that trials will be completed in time for delivery by the end of this year.
It’s a big day for the UK economy this morning after last week’s April GDP numbers showed a sharp slide in economic output of 20.4%. Across England non-essential shops will be re-opening for the first time since they were all locked down on the 23rd March, in what is likely to be a welcome relief for those retailers which have seen little or no income over the course of the last three months. Of course, while a number of these shops will be reopening it could well take some time for people feel bold enough to venture out and go into them at a time when the number going into the shops is set to be limited.
Mike Ashley’s Fraser Group announced on Friday it had taken a €108m stake in Hugo Boss, as he continues to try and broaden the appeal of the Fraser’s brand to a more upmarket audience. In February Fraser’s also took a 12.5% stake in Mulberry’s as the Fraser’s CEO stepped up his ambition, as he set out in 2018 to try and make the Fraser’s brand become the so-called Harrod’s of the high street. The big question now in this post Covid-19 world is what that High Street will look like in the coming weeks and months.
Airline and travel stocks have also come under pressure in early trade, even as EasyJet resumed flights today from Gatwick Airport, for the first time in almost three months.
Cineworld, this morning confirmed it was scrapping its contentious $2.1bn deal with Canada’s Cineplex, citing material breaches by Cineplex, which Cineplex has denied.
This morning’s confirmation is certainly welcome given the questionable logic behind pursuing the deal in the first place. There may have been a time when the deal did make sense when it was announced at the end of last year, but even then, there was concern that management were over-reaching, against a backdrop of slowing revenues and a decline in footfall.
Under current circumstances, and with their already high levels of debt due to the Regal acquisition a few years ago, pursuing the deal now would have been reckless in the extreme, and potentially hastened the demise of both companies in the current climate. Cineworld’s debt at the end of last year was already above $7bn, and an increasing subject of concern, with the company taking various steps in recent weeks to shore up its balance sheet, so today’s news is likely to be welcomed, even if it is mightily convenient.
Bunzl, the specialist logistics and services group is the best performer this morning after the company announced that trading in its first half was expected to show a 6% rise in revenues for the period, which is expected to see operating margins improve significantly from the same period a year ago.
The pound has also come under pressure over the weekend along with stock markets, ahead of the start of talks today between UK Prime Minister Boris Johnson and EU Commission President Ursula von de Leyen, as fears over a no deal Brexit intensify. Last week EU chef negotiators Michel Barnier struck a quite uncompromising tone with little sign that either party was willing to shift on fishing rights, level playing field regulations, and oversight with respect to the future relationship.
Oil prices are also on the slide over concerns about a second wave hammering demand even harder. The recent rebound in prices had been driven by the recent cuts in output from OPEC+ members, along with hopes of a v-shaped recovery, helping to put downward pressure on inventory levels. The prospect of a second wave would make the prospect of this happening take much longer to achieve.
US markets also look to open sharply lower on the back of today’s weaker Asia and European sessions, with record numbers of new cases across a number of states prompting concerns that the US hasn’t go to grips with the spread of the virus at all.