It has been a quiet trading session as dealers are content to sit on their hands and wait for the Fed rate decision at 7pm (UK time).
Interest rates are expected to remain in the 0.0-0.25% band, so the press conference 30 minutes after the announcement is likely to be the main event of the evening. Volatility has been low as many traders are playing the wait and see game. On Monday the World Bank warned the global economy might contract by 5.2% this year. The OECD hold an even bleaker view as they foresee a 6% contraction. In addition to that, the group warned the world economy could shrink by 7.2% should there be a second wave of infections. The pessimistic outlook has weighed on market sentiment as the major indices are set to finish in the red.
Inditex, the owner of Zara, posted a first quarter net loss of €409 million, which was in stark contrast to the €734 million profit registered in the same period last year. Keep in mind that equity analysts were expecting the loss to be €161 million. Sales slumped by over 44% to €3.3 billion. The lockdowns have clearly had a terrible impact on revenue, but the group is optimistic that most key markets will have reopened by the end of June. The online side of the business saw a surge in activity as sales jumped by 50%, and in April alone they rocketed by 95%. The fashion house now predicts that online sales will account for 25% of total sales by 2022. Previously the group was a bit guarded about the dividend policy, so there were fears it could be cut, but it announced a €0.35 pay-out, which has helped the stock buck the wider bearish trend today.
Photo-Me shares are in the red this afternoon as the company warned that full year profit before tax is now expected to be £10-£14 million, which would be a huge fall from the £42.6 million posted last year. The Covid-19 crisis was cited for the poor performance in 2020 – the majority of the revenue it had pencilled-in for March and April did not materialise. Annual revenue is tipped to be 5.5% lower on the year, and the firm said that trading in Asia, especially in China, has been weaker this year. Senior management will take voluntary pay cuts of 20% from next month until the end of the year. In addition to that, Photo-Me plans to restructure its operations in the UK, China and South Korea.
JD Sports confirmed it will reopen all its 309 stores in England from 15 June. It also intends to reopen its shops in Northern Ireland next week too. This is further evidence that things are starting to return to normal.
Restaurant Group announced that it will enter into a company voluntary arrangement (CVA), which will entail closing 125 leisure sites and that could cost up to 3,000 jobs. The bulk to the closures will impact the Frankie Benny’s chain. It was confirmed that 160 sites will not be impacted by the CVA. The news doesn’t come as a shock as the group made rumblings about closing sites in the past week.
Lufthansa shares are in the red as UBS has cut its rating on the stock to sell from buy. In addition to that, the bank slashed their target price from €18 to €5.85. The German government extended the travel warnings to people outside the EU until the end of August, so that is a factor in the negative share price move too.
Just Eat Takeawy.com shares have sold-off after it was confirmed it is in merger talks with Grubhub – which is in the red too. Grubhub were in merger talks with Uber but there were antitrust concerns. Just Eat Takeway.com have no exposure to the US, while Grubhub have no operations in Europe so the groups would complement each other. It wasn’t that long ago that Just Eat completed its merger with Dutch-listed Takeaway.com so some traders might be worried the firm is overstretching itself.
The sentiment on Wall Street is sour as traders await the update from the Fed. Jerome Powell, the head of the US central bank, is likely to mention negative interest rates as the topic has become more popular in the past couple of months, but traders are not expecting him to commit to such as policy. The Main Street Lending Programme is likely to be discussed, and the Fed recently tweeted its terms in an effort to issue more loans. Traders will be listening out for a mention of yield curve control too.
Airlines and cruise operators are in the red for a second day in a row as traders have booked some profits on the sectors recent gains. Stocks in the travel industry experienced large rallies in the final two weeks of May, so a bit of a pullback is not surprising.
Nikola Corporation is new to the stock market thanks to a reverse merger with VectoIQ. The group manufactures electric-battery and hydrogen-battery trucks so it is in a similar industry to Tesla. The comparisons don’t end there, as the group was named after Nikola Tesla, so dealers are likely to lump the two of them in together. Nikola shares are down 8%, while Tesla shares have topped $1,000, for the first time.
AMC Entertainment, the Cinema Group, said they plan to reopen their cinemas around the world in July. The group will introduce strict health and safety guidelines and certain seats in theatres will be deliberately kept vacant to promote social distancing. The news signals that things are heading in the right direction for the group. A number of it cinemas in Norway have recently reopened, so the group will be keen to roll out that practice across the board, but that will be dependent on local guidelines.
The poor old US dollar has dropped again as traders don’t want to be long the greenback going into the Fed meeting, even though no change to monetary policy is expected. Mr Powell will probably reiterate the Fed’s desire to use all its available tools to help the US economy. In light of last week’s much better-than-expected jobs report, the commentary from Jerome Powell might be a bit more measured.
EUR/USD and GBP/USD have been lifted on account of the fall in the US dollar. There continues to be a lack of progress being made in relation to the UK-EU negotiations, but that being said, the pound has managed to squeeze a little higher versus the euro.
Gold continues to rebound from the declines that were seen on Friday, when it fell to its lowest level in over four weeks, on the back of the well-received US jobs report. The continued weakness in the US dollar has lifted the metal as there is an inverse relationship between the two markets. Some traders are buying into gold in advance of the Fed meeting as the central bank is very unlikely to use language that is in any way hawkish.
WTI and Brent crude are in the red today as the API report last night showed that oil inventories jumped by 8.4 million barrels. The EIA announcement was reported a short while ago, and oil stockpiles jumped by 5.7 million barrels, while the consensus estimate was for a draw of 1.9 million barrels. Higher inventories might be a function lower demand.