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Markets look to US payrolls, as insurer M&A supports FTSE

CMC Markets

We’ve seen another day of gains in Asia today at the end of a week that looks set to eclipse the losses we saw in the lead up to this week’s US presidential vote.

Last night's Federal Reserve decision was pretty much a non-event, with Fed chair Jay Powell choosing to keep a low profile while the current US political uncertainty continues to play out. President Trump once again reiterated his determination to challenge the outcomes of the vote in the various states that are currently still seeing votes counted. He doubled down on claims that the election was being stolen in an alarming and disturbing escalation, that could see unrest spill over on to US streets. The most probable outcome still looks like a Democrat win with Joe Biden winning the presidency, however nagging doubts remain that the eventual outcome may well end up in the US courts.

For now, financial markets don’t appear too concerned about that, however it would still seem prudent to take some money off the table as we head into the weekend, and today’s US non-farm payrolls report. This appears to be the approach that is being adopted in early trade this morning, with European markets opening lower, after some decent gains so far this week. Many reasons have continued to be espoused for how resilient stock markets have been this week despite the current uncertainty.

One of my favourites is the prospect that central banks are more likely to step in with greater monetary policy activism. While that is certainly true, that was always going to be the case whoever won, so it's hard to argue that particular case with any semblance of credibility. There are a couple of other theories that do make more sense. The first one is that the lack of a blue wave is likely to mean that steps by the Democrats to rein in the tech giants with more business regulation, and higher taxes on the private sector in general, is now much less likely. This reasoning has some merit. The Democrats policy manifesto certainly had a higher tax and spend component so the fact that they may have missed out on gaining control of the Senate can certainly be construed as a plus for businesses. The other theory is that in the absence of an imminent fiscal plan, due to political deadlock, an easy win for Joe Biden would be for him to merely remove, or lower the various tariffs that President Trump imposed on China and the EU. This less confrontational approach could also deliver a modest fiscal boost to the US economy.

Today’s main focus away from the counts, in Arizona, Nevada, Georgia and Pennsylvania, will be on today’s US non-farm payrolls report, where the number of jobs being added is set to slow further if this week’s ADP payrolls report is any guide, which saw a sharp slowdown to 365,000, well below expectations of 643,000. Expectations are for 593 000 new jobs to be added in October, down from 661,000, while the unemployment rate is expected to fall further to 7.6% from 7.9%. We need to be careful in over interpreting a fall in the headline unemployment rate, given that the participation rate has also fallen sharply from where it was in February at 63.4%, with an expectation that we could see this come in at 61.4%. This means that 2% fewer people are actively looking for work than was the case in February, and as such are not being included in the headline numbers, so the real unemployment rate is much higher, closer to 10%. The underemployment rate is a much more accurate benchmark of where the US labour market probably is, and was at 12.8% in September, contrasting to 6.9% at the beginning of this year.

On the companies front we saw big gains in RSA Insurance shares yesterday. This wasn’t because their Q3 numbers came in better than expected, with underwriting profits up in the first 9 months of the year, despite a high number of Covid-related business claims. What saw the RSA share price surge over 45% was reports that the company was in talks with Canada’s Intact Financial and Denmark’s Tryg, about a £7.2bn deal that would see the company’s various businesses split up between the two.

The UK, Canada and other international businesses would fall under the umbrella of Intact, for the sum of £3bn, while the Scandinavian businesses would come under the administration of Tryg, for £4.2bn. The offer price was set at 685p, with the shares closing the day at 670p. Both parties have until 3  December to tie up the details, or withdraw the offer. This news has also given the rest of the sector a lift with Aviva and Legal and General shares pushing higher.

UK insurer Beazley this morning announced that it is setting aside $80m in Q3 in respect of pandemic related costs, saying it expects total losses to come in around $340m, unchanged from its estimates from September. Gross premiums for the nine-month period to date have seen an increase of 16% to $2.5bn, however investment returns for the year to date have halved from 4% to 2%.

Premier Foods this morning announced the disposal of its Hovis joint venture to Endless LLP for the sum of £37m. The stake was fully written down in 2016 so the £37m goes straight onto its balance sheet as it looks to bolster its cash position.

In the luxury sector Richemont has seen a decent performance in the first half, helped by a decent performance in its China business. Both revenues and profits beat expectations even if they were below the numbers from last year. First half operating profits came in at €452m, well above the €116m that was expected, with operating margins at 8.3%, helping to push revenues up to €5.48bn. Its deal with Farfetch also puts the business in a great position to leverage itself on Alibaba and TMall’s platforms in Asia. This has given the luxury sector a lift with Burberry shares near the top of the FTSE 100.

EasyJet announced this morning the sale and leaseback of another 11 aircraft for the total sum of £130.7m. At the end of last month, the airline raised £305.7m in a similar deal for nine of its aircraft, as it looks to bolster its balance sheet further for the long slog ahead as it strives to navigate its way through the current Covid crisis. With Q1 likely to see flights at 20% of the levels seen in a normal year, the need to bolster its cash position has become much more necessary, as it seeks to keep the rest of its fleet airworthy for when normal service resumes. This still leaves easyJet with 141 aircraft that it fully owns, which means it still has plenty of room to raise further cash if necessary.  

US markets also look set to open modestly lower later today, however they are still significantly higher on the week, with the NASDAQ up 8% alone. While the main focus is likely to be on the US non-farm payrolls numbers, we also have the latest Canadian jobs report as well, and here unemployment is also expected to remain steady at 9%, with 75,000 new jobs expected to be added.