As we come the beginning of a new quarter it’s been a quiet start to the week in Asia, with markets either closed for the start of Golden Week, or due to technical difficulties, with the Japanese session curtailed due to a hardware failure.

US stocks did get a boost yesterday on speculation of some form of stimulus deal before next month’s election, however most sensible feel this is mere wishful thinking. The optics of Pelosi and Mnuchin appear to be more about politics than actually caring a jot about the people they profess to serve.

European markets got off to a positive start with the primary focus on the latest manufacturing PMI numbers for September, which thus far have painted a positive picture if recent flash readings are any guide, as well as a decent Chinese manufacturing number earlier this week. The latest Spain numbers showed an improvement to 50.8, further evidence of broad recovery in global manufacturing activity, however this isn’t where the weak spots are, with services the main concern, and where the numbers are a continuing concern.

Rolls-Royce share price plummets to 16-year low

Rolls-Royce's share price has dropped to its lowest level since 2004, after the company announced its plans to raise extra cash to bolster its finances. Weekend speculation over a heavily-discounted rights-issue has seen the Rolls-Royce share price continue to decline this week, with management also reported to be in lengthy talks with a host of sovereign wealth funds. At the end of last week there was also speculation that the Kuwait Investment Office was also mulling a stake, which would have put the UK government in a somewhat tricky situation given it has a veto of sorts over any overseas shareholders.

Rolls-Royce clearly needs the cash to shore up its balance sheet, given the sharp drop in revenues it has experienced in the last few months, and which is likely to continue for some time to come. The continued procrastination however is not helping, and last night’s news that it had called off its talks with KIO and Singapore’s sovereign wealth fund closed off another avenue for the business. It’s being reported that the failure of talks was due to opposition from existing shareholders, which is fair enough, but then these existing shareholders need to come up with alternatives or face the breakup of the business. A vote will be held on the deal on 27 October, where shareholders will have the opportunity to either put up or shut up.

Today’s announcement that Rolls-Royce will be launching a £1bn bond issue as well as a £2bn 10 for 3 rights issue at a 41% discount to 130p is therefore long overdue, and will hopefully be well received by the same recalcitrant shareholders who were reluctant to dilute their stakes with funds from overseas.

Medical devices company Smith & Nephew's latest numbers have improved from the -29.3% revenue decline in Q2. Revenues in Q3 saw a decline of -4%. Orthopaedics showed the biggest rebound as a result of the resumption of elective surgery procedures like hip and knee replacements.

H&M Q3 results beat forecasts

High-street retailer H&M has responded to the slowdown in footfall in the high street by announcing plans to close 5% of its stores in 2021, as it reports Q3 numbers that beat expectations. Pre-tax profits came in at SEK2.37bn, above expectations of SEK2bn. Q3 sales came in at SEK50.87bn, while the company said 166 of its stores were still closed, though on the plus side online sales have continued to improve with a rise of 27%. Inventory levels have continued to remain high, however for H&M this is not a new problem, made more difficult by the lockdowns.

Bayer shares have also dropped sharply after forecasting a drop in EPS for the current fiscal year. The company has had its fair share of problems, from the litigation in the US over its “Roundup” weed killer as well as lower demand for its agricultural products as a result of Covid19. The company  has announced up to €1.5bn in cost cuts which are likely to come in the form of job losses, and other cost saving measures.

GBP hits one-week high vs USD

On the currencies front the US dollar has slid back across the board, on the back of the more positive backdrop for equity markets. The Australian dollar is the best performer while the pound has hit a one-week high against the US dollar as optimism grows about further convergence between the UK and EU when it comes to trade talks.

US markets look set to pick up where they left off yesterday on the back of the continued positive choreography coming from Messrs Mnuchin and Pelosi over a new stimulus plan. While markets continue to lean towards a positive outcome, it is difficult to escape the feeling that this is merely a façade for the benefit of the US voting public.

Fed extends restrictions on US banks

US banks are likely to be in focus later today after the Federal Reserve extended the restrictions on dividends and buybacks to the end of this year, after the market closed last night. This is likely to come as a disappointment to some bank shareholders, but given the uncertainty both economically and politically this is a prudent move on the part of the Fed, and it would have been surprising if they hadn’t done this. Banks are also likely to have to set aside further provisions for non-performing loans when they announce their latest quarterly numbers later this month.

On the data front, we’ll be getting the latest look at the US labour market with weekly jobless claims which are expected to improve to 850,000, from 870,000.


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