Equities opened lower today but they recouped their lost ground within the first couple of hours.

Europe

For the bulk of the session the mood was muted, but sentiment picked up since trading began in the US. The DAX 30 is leading the way, while the FTSE 100 is showing modest gains. The health crisis is still a pressing issue, but dealers have shrugged that off for now. It is worth noting, that the gains seen today are still very small when compared with the losses registered yesterday.    

Lufthansashareholders will vote whether to accept or reject the German government’s bailout deal. The package is worth €9 billion, but the Berlin administration would wind up with a 20% stake in the group if it gets support from investors. Traders are taking the view that the deal will get approved now that Heinz Hermann Thiel – an investor who holds a 15.5% stake in the airline – supports the proposal, until recently he was against the terms of the deal. The airline’s CEO said that no additional state funding will be required.   

Royal Mail announced that full year operating profit fell by 13.6% to £325 million, which was at the lower end of their guidance of £300-£400 million. Revenue ticked up by 3.8% to £10.84 billion. Within the group, the GLS unit, has been the better performer and profit increased by 17.5% to £ 208 million. The company cautioned that UKPIL is expected to be materially loss making next year. The company revealed a cost-cutting plan this morning. It will lower the management headcount by 2,000 and it expects to make savings of £130 million next year. Capital expenditure will be cut by approximately £300 million over the next two years. Earlier this year it was announced there would be no final dividend. Today Royal Mail said not to expect a dividend next year, but it hopes to pay a dividend the following year.

Wirecard shares have endured another brutal fall as the company filed for insolvency. The company has been in the spotlight recently as there were major concerns that a cash balance of €1.9 billion didn’t exist. In recent sessions the stock has seen major volatility as there were fears the company could go to the wall, so the news about the insolvency application hammered the stock price today.

EasyJet have raised £419 million from a share placing. The new shares were offered at 703p, which was a 5% discount on yesterday’s closing price. The quantity of new shares offered equated to 15% of the existing share capital. The airline has been hit hard by the pandemic, but easyJet are keen to ramp up the number of flights they offer in the next few months, and that was the motivation behind the share offering – it is gearing up for a relatively busy period. The airline posted its first half numbers yesterday after the close. The pre-tax loss widened to £353 million from £272 million last year.        

US

Sentiment has been going back and forth today as traders can’t make up their minds in relation to which way to turn. The pandemic is still an issue as states like Texas are still seeing an increase in cases. The initial jobless claims reading fell to 1.48 million from 1.54 million in the previous week, but economists were expecting 1.3 million. The continuing claims level slipped to 19.52 million from 20.28 million. It is clear the number of people returning to the workforce is relatively small when you consider the reopening of the economy. The durable goods update for May showed growth of 15.8%, and that was a huge rebound from the fall of 18.1% in the previous month. The levels of pent up demand were clearly high. The final reading of first quarter GDP was -5%, meeting forecasts.

Travel stocks are in the red as renewed concerns about the health situation has hit the sector. New York, New Jersey and Connecticut will require people traveling from Covid-19 hot spots to self-isolate for 14 days. Dealers are worried that this will impact people’ travel plans. Stocks like American Airlines, Southwest Air and United Continental are offside this afternoon. Worries about the rise of Covid-19 cases in the US has also hurt stocks like Royal Caribbean and Carnival as people are likely to curtail their travel plans.

There has been volatility in JPMorgan, Goldman Sachs, Bank of America, Citigroup and Morgan Stanley as it was proposed that regulations be eased, in a bid to take some pressure off the banking system. The proposed changes in regulations relate to margin requirements when dealing with other banks, and investing in certain funds. The Fed is expected to sign off on the proposals. 

The US banking sector will remain in focus as the results of the Fed’s stress test will be published later on. During the last reporting season the big banks collectively set out provisions for bad debts of $25 billion. On account of the pandemic, the industry is expecting a wave of defaults. It can be very difficult to predict how high the default levels will be, so it is possible the Fed might recommend that banks beef up their cash positions in an effort to remain nimble. The last time the stress tests were carried out, they factored in an unemployment rate of 10%, while the current rate is north of 13%, and it might actually be even higher than that as there is a 3% margin of error.    

FX

The greenback has pushed higher again today and that has put pressure on EUR/USD and GBP/USD. The dollar is still up on the day but it was higher earlier in the session – when stocks were in the red. The currency has been a common safe haven play lately, so now that sentiment in stocks has improved a little, it has handed back some of its gains.

The CMC AUD index and the CMC CAD index have both recovered a little from yesterday’s painful losses. The intense risk-off move yesterday weighed on the ‘commodity currencies’, but now the mood has lightened a little.

Commodities

Gold is largely flat on the day despite the firmer US dollar. In the last hour or so the risk-on sentiment has increased a little, but for much of the session the mood was muted. Lately the move in the US dollar has had a big impact on the gold market, but that hasn’t really been the case today. The asset hit its highest level in over seven years yesterday so the bullish trend is still in place.

WTI and Brent crude are higher this afternoon as traders have gone bargain hunting in the wake of yesterday’s major sell-off. The oil market tanked on fears that US demand would fall on account that some states were seeing an increase in Covid-19 cases, and that might prompt policymakers to tighten restrictions. The downgrading of the global growth forecast by the IMF hit oil too.       

 


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