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Market Outlook

The week ahead: Biden inauguration; Netflix, Burberry results

Read our pick of the top stories to look out for this week (18-22 January), and view our key company earnings schedule.

Michael looks back at this week's price action in equity and currency markets, and previews the Biden inauguration, ECB rate meeting, UK public finances, and retail sales data. He also looks at the key levels on all the major indices, currencies and commodities in what could be a busy week for equity markets.

China Q4 GDP and retail sales (December)

Monday: Retail sales growth in China returned to positive territory in August last year and since then has continued to improve month on month. The lack of a second wave has certainly helped, and while demand still remains well below the levels at the end of 2019, there have been three consecutive months of gains since September. December’s numbers are expected to continue that trend, with a rise of 5.5%, up from November’s 5% gain, boosted by Singles Day and the Golden Week holiday.

Chinese consumers are slowly reopening their purse strings, meaning that the performance of the Chinese economy as a whole through H2 is likely to be strong after a weak first half of the year. In Q3 the Chinese economy expanded 4.9% year-on-year after the big -6.8% decline of Q1, and in Q4 is expected to post a rise of 6.2%, which would be a decent rebound after the early year lockdowns and disruptions. Industrial production is also expected to remain resilient; it is already back at pre-pandemic levels at 7%.

Goldman Sachs and Bank of America Q4 results

Tuesday: After some decent numbers from JPMorgan, and the Fed opening the door to the resumption of buybacks and dividends last month, investors will be looking at Goldman Sachs in particular for any signs that it will look at resuming pay-outs. In Q3 the bank generated $3.62bn in profits blowing through market expectations, as well as posting a 30% rise in revenues to $10.78bn. The bank’s trading division generated $4.55bn of that total, helped by a strong performance in bond trading. CEO David Solomon is undergoing a modest restructuring of Goldman Sachs with a greater focus on wealth management. Expectations for Q4 are for profits of $6.877 a share.

Bank of America’s most recent Q3 numbers were slightly disappointing, coming in short on revenue at $20.45bn. Profits fell 16% to $4.9bn, as a result of weaker net interest margins. The bank also set aside $1.4bn in the form of loan loss provisions in Q3, down from the $5.1bn in Q2, pushing the total for loan losses up to $11.2bn year to date. As we look to Q4 the big question, in light of the recent slowdown in the US economy at the end of last year, is whether this figure is likely to be increased, and if so, by how much. Profits for Q4 are expected to come in at $0.53c a share.

Netflix Q4 results

Tuesday: One of the big winners of the last 12 months has been online streaming platforms, with the Netflix share price up over 50% since this time last year. The first half of Netflix’s fiscal year saw an explosion in the number of subscribers to its service, with 25.8m new users. This growth slowed sharply in Q3 with only 2.2m new subscribers. Even allowing for the modest Q3 growth, Netflix still managed to add more subscribers in the first three quarters of 2020, than it did in the whole of 2019. Revenues in the first-half came in at $11.92bn, a record number. The return of live sport to TV screens may have had had something to do with the slowdown in subscriber numbers in Q3, along with some modest price increases to its subscription model.

For Q4, Netflix said it expected revenues to come in at $6.57bn, while adding another 6m new subscribers, both of which at the time were below what investors had been hoping for. For the last three months the Netflix share price has traded sideways, still fairly close to last year’s record highs, with investors slightly cautious that recent Netflix share price momentum may slow as Apple and Disney start to get their act together in what is a highly competitive market. Netflix is still the market leader in the sector, and it also leads the way in non-English content which also sets it apart from its peers internationally. It also has a strong content slate with season 3 of Star Trek Discovery, and season 4 of The Crown, while production has started on the fourth season of Stranger Things, which lands later this year. The continued closure of cinemas into this year is likely to keep these subscriber numbers fairly buoyant, with most attention on its international markets for future growth prospects.

Burberry Q3 results

Wednesday: 2020 wasn’t a great year for the Burberry share price, falling 16% over the last 12 months, despite some improvements to its Asia business after the initial hit from coronavirus in early 2020. Last May the company reported full-year numbers that saw operating profits slide 57% to £189m. Revenues were hit hard by the costs of the disruptions in Hong Kong as well as the closure of various stores due to coronavirus pushing their impairments up to £245m.

This year’s performance hasn’t been much better. In Q1 sales fell 45% and while Q2 sales did improve that didn’t prevent pre-tax profits falling 62% in the first half of the financial year, coming in at £73m, down from £193m a year before. The company has taken steps to shore up its finances, while the lack of a second wave in China and its other Asia business helped an outperformance there which looks set to translate into this week’s Q3 numbers. There may be a trade-off with the tighter restrictions in Europe, the UK and US over the past few weeks likely to act as a drag, though the digital business could help to offset any weakness here.

Dixons Carphone Q3 results

Wednesday: Another retailer hit hard by the store shutdowns in the spring, Dixons Carphone posted a 51% fall in full-year profits in the summer, largely as a result of higher costs from store closures as a result of Covid-19, but also restructuring. Looking at the overall revenue numbers the picture was more positive with a big increase in online sales, which helped offset some of the hit. The biggest impact revenue wise was on mobile revenue which saw a decline of £409m, sliding to a loss of £104m.

These losses are expected to widen in this fiscal year, however mobile makes up just under 20% of total revenues. In the areas of the business that account for the other 80% there was decent growth across the board. Since the record March lows the shares have recovered a good proportion of their lost ground year to date, but still remain 20% down on the year. However, a good pre-Christmas period and the news about a vaccine means that the outlook is much more positive than it was a couple of months ago, despite the November lockdowns.

UK/EU CPI (December)

Wednesday: With all the problems facing the UK and broader European economy these past 12 months, inflation has been fairly subdued, though in Europe the deflationary bias has been much more noticeable. In the UK, inflation has also been fairly benign though core prices have been higher than the more generally-used headline number. It has also been tougher to track UK inflation over the last year due to the unavailability of some products which are normally used to calculate prices in the inflation basket. Nonetheless price pressures have been subdued, with November prices falling back to 0.3%, though core prices are higher at 1.1%. This week’s December numbers could well see a modest rise as a result of higher fuel costs, though weak demand is likely to limit the upside.

In Europe, there is little to no evidence of rising prices with the final December numbers showing a decline of -0.3% in headline CPI and core prices at an annualised 0.2%, a number which is likely to heap further pressure on the ECB to try and guide inflation expectations higher, using forward guidance.

US presidential inauguration

Wednesday: All eyes are set to be on Capitol Hill this week with the inauguration of Joe Biden as the 46th President of the United States. Four years ago, President Trump marked his inauguration with a speech which set the tone for the next four years in terms of its tone and belligerence.

This week’s speech is unlikely to be as divisive in tone, however it will certainly give a decent indication as to what sort of programme the new administration is likely to implement over the next four years, from trade policy with China, to domestic policy on investment in energy, renewables and other infrastructure, where Federal spending has been rather lacking in recent years.  

Last week the President-elect outlined a new fiscal aid programme of $1.9trn. Support will be spread across a variety of areas, specifically in the form of $350bn in state aid, an increase in the minimum wage, and a further $1,400 in stimulus payments to US workers. There was little in the way of detail about future long-term spending commitments on infrastructure and other types of investment including education and energy, however this is likely to come once he has got his feet under the desk in the Oval office.

ECB rate meeting

Thursday: Over the past 12 months the ECB has shown it is prepared to shift policy when required in order to support the European economy, despite the lack of urgency from EU policymakers in taking fiscal actions of their own. They’ve not been helped as the euro moved up above the 1.2000 level against the weakening US dollar. This has added to the deflationary pressure on an economy that has tipped back into recession and is unlikely to recover much before the second half of 2021, due to tighter lockdown restrictions that have been in place for most of Q4 last year, and look to get extended into Q2 of this year.

In December the central bank expanded its Pandemic Emergency Asset Purchase programme for the second time in 2020, from €1.35trn to €1.85trn, as well as extending it for another nine months until March 2022. While this buys time, along with new TLTRO loan programmes, the ECB can’t act alone given it is already operating at the limits of its mandate, requiring help on a much bigger fiscal scale. That is only just coming, in the fairly limited form of the EU recovery fund, and only €390bn worth of grants from the €750bn fund, far too low to really make much of a difference.

On the plus side manufacturing appears to be holding up fairly well, however services PMIs are still well into contraction territory, with little prospect of a strong rebound due to the continuation of restrictions in France, as well as Germany. While the ECB has gone to great lengths to insist that their monetary toolbox still can still deal with the prospect of a double-dip recession, the rise of the euro and a weaker US dollar is not helping their cause. We are now finally seeing fiscal stimulus on a large scale on a country level, with Germany leading the way in that regard, with the temporary suspension of the fiscal compact. However this stimulus is being delivered very much on a localised basis, as opposed to being on a pan-European level, with Italy, Spain and Greece in the most economic need. With the damage from the pandemic likely to extend well into 2021, Europe really needs to get its act together, otherwise further economic schisms could open up further over the next year.

France/Germany flash PMIs (January)

Friday: In the most recent December PMIs, the numbers continued to paint a mixed picture for the German economy, with services remaining into contraction territory at 47, a slight improvement from 46 in November, while manufacturing remained resilient rising to 58.3, from 57.8, and close to levels last seen in March 2018. January is likely to be a similarly bleak story for services given that German Chancellor Angela Merkel more or less cancelled Christmas by imposing a harder lockdown well into this year against a backdrop of a death count which rose to over 1,000 a day.

In France the situation has improved a little with services improving to 49.1 in December from a slide to 38.8 in November. With restaurants and bars in France set to remain closed until next year it is hard to see the case for any type of decent recovery any time soon, which means January is likely to see the fifth consecutive month of contraction. Despite the positive vaccine news, lifting the mood from a market point of view, it is clear that there will be no similar uptick in economic activity until such times as restrictions start to get eased, perhaps sometime in the spring. On the plus side manufacturing has been a strong performer for both Germany and France, helping to offset some of the slowdown on other parts of their economies.

UK public finances (December)

Friday: There has been a lot of chatter in recent months over the explosion in UK public debt as a result of the pandemic and the emergency measures taken by the UK government to support the economy. This probably goes someway to explaining the rather erratic government response to the pandemic as the innate caution of Rishi Sunak comes up against the eye-wateringly high numbers the government is spending on a month-to-month basis. In November the government borrowed £30.8bn, bringing the total amount borrowed for this fiscal year to £245bn, with the very real prospect that the total sum could well rise to well over £300bn by year end. While it is entirely understandable for there to be a debate about these unprecedented levels of public borrowing, one has to question whether now is the right time to do it, given that we haven’t as yet controlled the virus, even with the vaccine programme now in full swing.

The UK is not unique in the challenges it faces, as a quick look across the English Channel or the Atlantic will tell us. Every other country in the world is facing the same seismic issues, which means that if the government is sensible the sums being spent can be paid back over decades in the same way the money spent in World War 2 was repaid. This pandemic should be viewed through a similar lens, with the money repaid gradually over decades. It’s not as if borrowing costs are high, they are not, with bond markets fairly sanguine about the levels borrowing taking place not only here, but all over the world. Borrowing for December is expected to come in at £31bn.

UK retail sales (December)

Friday: Since the in April lockdown last year UK retail sales growth saw six consecutive months of gains, however these came to a shuddering halt in the November numbers due to the lockdown restrictions that were put in place from 5 November. A decline of -3.8% shouldn’t have come as too much of a surprise given that the boost to October was a result of some pull-forward effect from November as consumers tried to do all their November pre-Christmas shopping before the lockdown began due to concerns it might get extended up until Christmas.

The biggest drag to retail sales is likely to be from closing bars and restaurants which have suffered big declines in income, though as recent retail numbers have shown the boom in online and digital sales could help to compensate. Sales of electronic items are likely to be have been boosted with the rollout of the new Xbox and PlayStation 5, which suggests that despite pessimism around the end of year numbers, we might see an upside surprise. Expectations are for a rise of 1% given that the tighter restrictions didn’t really kick in until mid-December. We also have the latest flash PMI’s for manufacturing and services which are expected to weaken slightly to at 53 and 45 respectively.

Index dividend schedule

Dividend payments from an index's constituent shares can affect your trading account. See this week's index dividend schedule

Selected UK & US company announcements

Monday 18 January Results
No major announcements scheduled  
Tuesday 19 January Results
Bank of America (US) Q4
Goldman Sachs (US) Q4
Halliburton (US) Q4
Kier (UK) Q2
Netflix (US) Q4
Watkin Jones (UK) Full-year
Wednesday 20 January Results
Bank of NY Mellon (US) Q4
Burberry (UK) Q3
Dixons Carphone (UK) Q3
JD Wetherspoon (UK) Q2
United Airlines (US) Q4
WH Smith (UK) Christmas trading
Thursday 21 January Results
Banner (US) Q4
Citrix Systems (US) Q4
National Bank (US) Q4
Pets at Home (UK) Q3
Union Pacific (US) Q4
Friday 22 January Results
Huntingdon Bancshares (US) Q4
First Horizon (US) Q4

Company announcements are subject to change. All the events listed above were correct at the time of writing.