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News

Sterling pops post BoE, FTSE underperforms

Continental equity benchmarks are higher as we approach the close of business as optimism that the Biden administration will sign off on a stimulus package has helped the mood.  

Europe

Sterling is stronger in the wake of the Bank of England’s (BoE) update, which is a factor in the FTSE 100’s underperformance. In light of the restrictions in the UK, the BoE warned that first quarter growth will be negatively impacted versus the forecasts issued in November, GDP in the first quarter is tipped on contract by 4%. On the other hand, the bank doesn’t seem likely to introduce negative rates in the near-term, hence the jump in the pound. Andrew Bailey, the BoE boss, doesn’t want to rule out the policy but at the same time, it is only if the situation deteriorates, would the bank contemplate such a move.

Internationally focused stocks like Reckitt Benckiser, British American Tobacco and Imperial Brands are feeling the squeeze of the firmer pound, their overseas revenue will be hurt. That is being balanced out to an extent by the rally in NatWest Group, Lloyds and Barclays. British banks stand a better chance of increasing their lending margins if the BoE doesn’t apply negative rates.       

Barratt Developments delivered a solid first half update. Revenue rose by 10% to £2.49 billion, pre-tax profit ticked up by 1.7% to £430.2 million. Forwards sales are 14,289, up from 13,043 last year. Housebuilders incurred disruption in 2020 on account of the coronavirus related restrictions but due to healthy demand, order books are now robust, this is what Barratt are experiencing. The group said the strong rebound in completions helped it made good progress towards achieving its medium term targets. An interim dividend of 7.5p was declared, it was announced last year that it would resume pay-outs to shareholders. As a way of stimulating demand, the UK government scrapped stamp duty on properties worth up to £500,000, the incentive expires at the end of March. Demand is likely to cool after the promotion finishes. 

Business is ticking along at BT Group. The Openreach fibre to the premises (FTTP) is now connected to 4.1 million properties and it is on track to achieve its target of 4.5 million premises by March. Third quarter FTTP sales were strong as it hit 17,000 per week – a record. The 5G customer base is now 2.1 million and it is available at 125 locations. The pandemic caused disruption to its business, hence why nine month revenue and adjusted EBITDA dropped by 7% and 5% respectively. Management said it is trading in line with forecasts. The annual cash flow has been revised to £7.2-£7.5 billion, the lower end of the forecast was upped. BT still expects to achieve its full year earnings target of between £7.2 billion and £7.5 billion, the followings year’s target is for earnings of at least £7.9 billion.

Royal Dutch Shell registered full year adjusted earnings of $4.85 billion, which was a painful fall from the $16.5 billion that was set one year ago. Equity analysts were expecting $5.15 billion. 2020 was a brutal year for the energy sector as it crippled demand, in addition to that, demand perceptions remain low so oil is a long way off from levels seen in 2018-2019. Downturns are typically a time for belt tightening, which is exactly what Shell did. In September, a $2.5 billion cost reduction scheme was announced, it included cutting 9,000 jobs. Today’s update showed that net debt was reduced by $4 billion to $75 billion. Traders honed in on the fact the oil titan will increase its first quarter dividend by 4% to 17 cents. Royal Dutch last year cut its dividend as the pandemic took hold, it was the first cut to the pay-out since the 1940s, so it is clearly trying to restore its reputation. Some might question the decision to hike the dividend when debt levels are still high.

Unilever confirmed that full year underlying sales growth increased by 1.9% but underlying operating profit slipped by 5.8% to €9.4 billion, as operating margins fell by 60 basis points to 18.5%. As a part of its fuel for growth scheme, it saved $2 billion in the year. Sales growth in the final quarter in developed and emerging markets grew by 3.6% and 3.5% respectively. It is encouraging to see that sales momentum has ticked up recently. Unilever predicts that long term profit growth will be ahead of sales growth, if they want to achieve such a target, the group will need to get a handle on costs. China and India returned to sales growth in the second and third quarters respectively, both markets are important from a long term growth point of view. The company cautioned that high single digit commodity inflation is in the pipeline for 2021, so that could keep margins under pressure. The quarterly dividend was lifted by 4% to 42.6 cents.           

US

Equities are showing modest gains as the mood is being helped by hopes the US government will provide assistance to the economy by pursuing a stimulus plan. Also aiding the mood is the positive jobs data. The jobless claims reading fell from 812,000 to 779,000 – it’s lowest in two months. Continuing claims were 4.59 million, down from 4.78 million. Yesterday’s ADP employment report topped forecasts. The latest data should help set the tone for tomorrow’s US non-farm payrolls report.       

EBay shares are in high demand following the group’s well received fourth quarter numbers last night. EPS was 86 cents and equity analysts were expecting 83 cents. Revenue was $2.9 billion beating the $2.6 billion forecast. The online auction house and retail group issued an upbeat first quarter outlook too, EPS is predicted to be $1.03-$1.08, while the revenue guidance is $2.94-$2.99 billion.   

Apple plans to go down the electric vehicle (EV) route. It is edging towards striking a deal with Hyundai-Kia, the Japanese-Korean company. It is early days yet but there is talk that production will commence in 2024. Apple has its fingers in several pies. The tech titan recently posted quarterly revenue that topped $100 billion for the first time. Tesla has a big head start but Apple, has very deep pockets so it could easily become a formidable player in the EV market in the years ahead.      

Canada Goose, the clothing company, announced that its third quarter sales increased by 4.8% on an annual basis to C$474 million, easily exceeding the C$415.2 million that analysts were expecting. EPS was C$1.01, topping the C$0.96 consensus estimate. Gross margin increased from 66.8 basis points last year to 80 basis points. 

PayPal’s fourth quarter numbers were solid. The payment group revealed revenue of $6.1 billion and EPS was $1.08, both came in above expectations. It was a record performance said Dan Schulman, the CEO.        

FX

Once again the US dollar is driving higher. The dollar is seeing higher demand on the back of hopes the US’s economic recovery will outstrip that of many other countries in the west. In the final quarter of 2020, the US economy expanded by 4%, while the eurozone contracted by 0.7%. Also, playing into the mix are the hopes the Biden government will sign off on a stimulus package soon. Today’s US jobs data helped the dollar. EUR/USD traded below 1.2000 – the first time since 1 December - on the back of the dollar’s move.

The CMC GBP index hit its highest level since March following the BoE update as traders are taking the view the bank won’t cut rates sub-zero anytime soon.    

Commodities

It is no coincidence the US dollar has risen to a two month high and that gold has fallen to a two month low. The yellow metal is traded in US dollars so a rally in the greenback, typically dents the commodity. While gold holds below the $1,800 mark, the bearish move is likely to continue, support might be found at $1,764.

Brent crude oil and WTI are higher again as supply concerns are underpinning the price. Yesterday, OPEC+ maintained its production level. In addition to that, the body predicts that inventory levels will dip below their five year average in June. The latest EIA data showed that US oil inventories fell to a 10 month low, underlining the view that demand at the moment is robust.