Another big fall in the Nasdaq overnight dragged US markets lower overall as another sharp rise in US yields continued to keep investors off balance, despite a more positive outlook from the latest Fed Beige Book.
The FTSE250 did even better, registering its best close in over a year, as the measures announced by UK Chancellor of the Exchequer Rishi Sunak translated into a big jump in the likes of travel, leisure and hospitality stocks.
Today’s open in Europe can only be characterised as a broadly negative one after the gains of the past few days, as the weak finish in the US, and similarly negative Asia session is dragging on sentiment.
While one can understand why investors are concerned about valuations in the US, particularly around the tech sector which has driven a lot of the gains in the US over the past few years, against a background of rising yields, the same can’t be said in Europe where valuations are much lower.
This is likely to limit any downside for markets in Europe, even if yields do continue to edge higher in the US. It does become a bigger problem if the spike in yields in the US starts to infect yields elsewhere and there are signs of that happening, however with base metals prices starting to show signs of cooling we could see the pressure come off yields in the coming days.
Later today Fed chairman Jay Powell will have the opportunity to comment further on the recent rise in yields, and while there is an argument that they are reflective of a more positive economic outlook, there is also a risk that if they rise too quickly the Fed may well have to be more forceful in its interventions, or reaction function, to keep them under control.
It is still notable that US 2-year yields are still well below their peaks of last summer which suggests that in the near-term markets are still sanguine about a rise in inflationary pressures. There has been some talk that the Fed might look at some form of operation twist where the Fed buys bonds at the long end, pushing yields down, and sells bonds at the short end. The problem with that is it pushes short term yields higher, at a time when overall debt levels are much higher.
In a welcome boost to the London IPO market, Deliveroo announced this morning that it plans to launch its upcoming IPO here. In the middle of last month, it was speculated that this could come as soon as next week.
With its finances only recently bolstered by $180m of new funding from its stakeholders of Fidelity and Durable Capital Partners in January, the company could fetch a valuation of up to £8bn. Deliveroo also has operations across 200 cities in Asia, as well as in Europe, and is likely to see plenty of interest given that the IPO of DoorDash in the US did fairly well with Deliveroo’s backers also having stakes in the DoorDash business, so they know the sector well.
The airline sector has had a turbulent time of it in recent months, with various rescue packages keeping the sector afloat, and where reopening optimism has seen a decent rally in the share prices of the likes of EasyJet, IAG and Ryanair.
While this is all well and good, huge challenges still remain on a cash flow basis, particularly as normal service is unlikely to return for a few years. This morning German flag carrier Lufthansa announced full year losses of €6.7bn, and said that it could well take even longer to break even than originally predicted, predicting that the market may not recover fully until 2024.
The airline also cut its expectations on 2021 capacity level to an upper margin of 50%, down from 60%, on the back of the slow vaccine rollout in Europe, while also urging the adoption of internationally recognised digital vaccination and test certificates to encourage people to get back on planes.
Aviva has been on a bit of a disposal spree in the last few months, selling its Singapore business for £1.6bn to Singlife and a consortium of other buyers in September, as well as the sale of its stake in Italian business, Aviva Vita in November for €400m, and the Hong Kong and Vietnam businesses in December. This morning it has announced another disposal, selling Aviva Italy to Allianz for €873m. These sales are part of new CEO Amanda Blanc’s desire to focus on the company’s core markets of UK, Ireland and Canada, and it appears to be paying off.
In November we saw new business sales in UK and Ireland rise by 40%, and in today’s full year numbers we’ve seen continued growth in all areas of the business, from assets under management, which have risen to £81bn for bundled workplace pensions, to record net flows of £8.5bn for savings and retirement.
Group operating profits also beat expectations, coming in at £3.16bn, well above consensus estimates of £2.73bn, and only 0.7% below last year's number. The company also confirmed a final dividend per share of 14p, with the shares higher in early trade.
The retail sector has also been a casualty of the pandemic; however, some have done better than others in facing the challenges of various restrictions and lockdowns. B&M European Value Retail has been one such winner, announcing this morning in a Q4 update that full year EBITDA for 2021 is expected to be in the range of £590m to £620m, even after the repayment of business rates of £80m.
The construction sector has also faced a number of challenges as a result of Covid-19, with lower sales and revenues for Irish building materials group CRH. Overall sales fell 2% to $27.6bn, with like for like sales in its America business declining 3%.
Pre-tax profits from continuing operations also fell from $2.18bn to $1.66bn, with impairments of $819m acting as the main drag.
Melrose Industries, who bought GKN in 2018 has also been impacted by the shock to the civil aerospace sector in the past 12 months. In September the company announced it was planning big job cuts after reporting a H1 loss of £560m. Today the company announced a full year pre-tax loss of £535m, as revenues fell to £8.77bn. The company also announced it was looking to sell Nortek Air, with no expectation that a sale would take place, even though the business is performing well.
The company was downbeat on the aerospace sector with no recovery expected during 2021, though sales and margins were improving strongly in automotive and powder metallurgy. Also, on a positive note, a 0.75p dividend was announced.
Sports betting and gaming group Entain, formerly GVC Holdings, announced a pre-tax profit £174.7m on the back of revenues of £3.56bn. Its joint venture with MGM is now live in 12 states with market share up around 18%, and is currently the number one operator in iGaming across the US.
Its planned acquisition of Enlabs also remains on track.
Rio Tinto is among the biggest fallers in early trading after the resignation of its chairman over company failings over the destruction of aboriginal sites. The shares are also trading ex-dividend. Lower base metals prices, with copper at a one week low, and a downbeat note from Bernstein on iron ore exports is also weighing on the sector with BHP also lower.
Crude oil prices shrugged off a huge 21.6m build in EIA stockpiles yesterday. This was due to refining capacity falling to 56% of overall capacity, the lowest on record. This meant that the oil never made it to the refinery, causing gasoline inventories to fall off a cliff as the whole Texas supply chain froze up due to the cold weather.
With OPEC+ due to meet later today there has been some speculation that there could be an agreement to push up production so that prices have a chance to cool off, and avoid a possible demand destruction scenario. This speculation has cooled in recent days on reports that Russia is considering rolling over its cuts into April rather than raising output, with the result that oil prices have started to edge higher again.
Bitcoin is back above $50k again as the tug of war between the bulls and bears around that level continues.
US markets look set for a cautious open later today, ahead of comments from Fed chairman Jay Powell. On the data front we’ll be paying close attention to the latest weekly jobless claims numbers after a weaker than expected ADP payrolls report for February yesterday, which saw 117k jobs added, well below expectations of 200k. It also makes tomorrow’s payrolls report a much more interesting proposition.
In a sign that the move to online shopping is doing more damage to the retail sector on the ground Disney announced it would be closing 60 of its Disney stores in the US.
Vroom shares slipped after hours after falling to a bigger than expected loss, for Q4 of $0.44c a share, as well as guiding its outlook lower for Q1, with an even bigger loss of $0.62c a share. In terms of revenues, it said it expects to see revenue of $500m to $529m.
Snowflake also slipped back after hours after issuing lacklustre full year guidance. The company has done well since its IPO in September last year, however there is a sense for all of its success the valuation may well be a little stretched.