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Market Outlook

The week ahead: UK & US retail sales; Barclays, NatWest results

Read our pick of the top stories to look out for this week (15-19 February), and view our key company earnings schedule.

Michael looks back at the latest moves in global equity markets and currencies, while also looking ahead to the latest UK economic data, after the surprise Q4 expansion in UK GDP. He also previews this week's FOMC minutes, and discusses the latest full-year numbers from Barclays and NatWest.

Palantir Technologies Q4 results

Tuesday: Palantir’s Q3 report was the first set of numbers following its launch on the US stock market. The company specialises in big data analytics, counting the US government as one of its biggest clients with $1.5bn worth of contracts, particularly in the areas of defence and counter terrorism through its Palantir Gotham service. 

Last year the company lost $579.6m, and hasn’t made an annual profit since it was founded in 2003. The revenue picture is equally worrying, with annual revenues last year at $740m, and operating expenses which appear high at over $500m. That doesn’t seem to matter too much to investors, who have driven the Palantir share price upwards from the $10 listing price. In Q3 the company reported a loss of $0.94c a share on revenues of $289.4m, while also predicting that full-year revenues were expected to come in at $1.07bn, a 44% increase from a year ago. In Q3 the company signed new contracts with the US army and National Institutes of Health for a combined $127m, while also renewing a $300m aerospace contract. Expectations are for a modest profit of about $0.02c a share.

EQT Q4 results

Wednesday: One of the largest natural gas producers in the US, the EQT share price has made some fairly decent gains over the last quarter, on expectations that demand will rise as the world shifts to cleaner energy sources. Natural gas demand tends to rise organically during winter months in any case, and EQT’s resources in the Appalachian basin are among the richest in the world. Demand for this cleaner fuel is unlikely to diminish, especially since the new Biden administration appears determined to crack down on dirtier fuels. 

The company recently acquired some natural gas assets from Chevron further south in Pennsylvania and West Virginia for $735m, which should add to its ability to easily meet future demand without adding to its overall production cost base too much. With natural gas prices up near two-year peaks, the outlook for EQT looks positive. The company is expected to post a loss of $0.27c a share.

FOMC minutes

Wednesday: The lead-up to the January Fed meeting was notable for some apparent policy differences on the part of several Fed officials. They included Raphael Bostic of the Atlanta Fed who suggested, in contrast to the December messaging of 'lower for longer', that there could be a taper of the $120bn monthly asset purchase by the second half of this year, and a rate hike before the end of 2022. While Fed chief Jay Powell, along with vice Chair Richard Clarida, clamped down on this messaging at last month’s meeting, these concerns haven’t gone away given the prospect of another large stimulus program, and a US economy that looks more resilient than some of the recent data might suggest. 

At the press conference Powell was keen to stress that the recovery was still fragile, and a little weaker than had been the case in December, nonetheless concerns about higher prices weren’t particularly elevated in the short term. His comments that the Fed was prepared to tolerate inflation above 2% for some time suggests that they might be prepared to look past any short-term pressures. This does appear to being reflected in bond yields, with the short end fairly steady, however long-term inflation expectations are rising quite sharply. As such it will be interesting to note whether the concerns articulated by some FOMC members in early January got an airing in the broader discussions around what might happen if inflation pressures did start to accelerate beyond their comfort levels.

UK CPI (January)

Wednesday: In recent months these numbers have fallen off the radar a little, however given the sharp rise in 10-year yields in the past month in the US as well as here, long-term inflation expectations have been rising since the end of last year. A combination of a large-scale fiscal expansion in the US, alongside additional fiscal support here in the UK in next month’s budget have sent US and UK yields up to their highest levels since before the pandemic. Concerns have grown that all of this extra liquidity, along with an economic reopening, could lead to an inflationary spike.

The UK 10-year briefly edged above 0.5% on the 8 February for the first time since 23 March last year, and while it has slipped back since then, any sign that inflationary pressures are starting to build up in the system could prompt concerns about a rise in prices. This isn’t expected to manifest itself in this week’s January numbers, however the headline CPI numbers could start to get more interesting as the year progresses. Expectations are for UK inflation to slip back to 0.5% from 0.6%, with core prices also set to decline to 1.3%, from 1.4%.

US retail sales (January) 

Wednesday: After a decent recovery in the aftermath of last year’s April lockdown, US consumer spending rebounded quite strongly as the US consumer spent their stimulus cheques, and the economy showed a strong improvement through Q2 and Q3. This growth started to slow quite markedly in Q4, as the expiry of certain unemployment benefits, uncertainty over the US election, and the imposition of tighter coronavirus restrictions started to weigh on consumer confidence.

This consumer slowdown, and the political deadlock on Capitol Hill over a stimulus package, saw retail sales in November and December slide back quite sharply, by -1.1% and -0.7% respectively. Since then, the economic data has picked up markedly, helped in some part by the new $900bn stimulus plan that was agreed at the end of last year, and expectations over another $1.9trn later this quarter. This optimism is likely to translate into a rebound in consumer confidence, and possibly consumer spending, after a disappointing Thanksgiving and Christmas period. Expectations are for a 0.8% recovery to start the year, which could well continue into the rest of Q1.

Barclays full-year results

Thursday: The past 12 months have been difficult for banks in general, but UK banks have underperformed even relative to their peers, as Brexit and the Covid-19 pandemic weighed heavy on investor sentiment. As a result of these concerns, their overall performance since the beginning of 2020 has been disappointing. Barclays has been the best performer among the big four, currently down over 15% from where it finished 2019. 

The recovery from the lows of March 2020 has been a long slow one, with management forced to cut shareholder pay-outs, as well as setting aside £608m in provisions for non-performing loans in October. This provision was slightly lower than expected, bringing the total year to date to £4.3bn, and there was also an increase in PPI provision of £1.4bn. The £608m came on top of the £3.7bn set aside in the first half of the year, a fall of 63% from Q2, with the bank saying that provisions in the second half of the year are likely to be lower than those in H1. Provisions for credit card debts was also sharply lower, making up £183m of that £608m total. 

As we navigate our way through this latest lockdown, there is a risk that the optimism we saw back in October may well have been misplaced, and there could be an increase in provisioning. On the plus side, if the recent performance of US banks is any guide, along with the recent steepening of the yield curve, the investment banking division could well help offset any underperformance in its retail operations, with any outperformance offering an insight into when management might look at reinstating the dividend.  

Dropbox Q4 results

Thursday: When Dropbox IPOd almost three years ago at $21 a share, it got an early day pop, and spent the most part of 2018 well above its IPO price. It then spent next two years struggling to meet its rather lofty valuation. Since its March lows of last year of just below $15, the shares have slowly recouped those losses to be trading near $25, with the company generating a quarterly profit for the first time in Q1 last year, when it posted a profit of $0.09c a share on revenues of $455m. 

The big move to homeworking has helped companies like Dropbox enormously, however given that is competing with the likes of Microsoft and Google it has still done well to grow its user base to 600m in over 180 countries, with average revenue per user coming in at around $128. Full-year revenues look set to come in at $1.9bn, a rise of 14.9% from a year ago, while quarterly profits are projected at $0.23c a share, pushing full-year profits to $0.90c.   

Walmart Q4 results

Thursday: Walmart shares have been another big winner of the coronavirus pandemic. Having increased ecommerce sales by 74% in Q1, the retail giant went better than that in Q2 with an increase of 97%, as more customers stayed at home and ordered online. With the increasing popularity of online services Walmart announced the launch of membership service Walmart+ in Q3, in order to better compete with the likes of Amazon Prime. 

In Q3, ecommerce sales increased by 79%, however the company declined to offer an outlook. Revenues in Q3 came in a $134.7bn, and the international business is also doing well. Business costs remained elevated, coming in at $600m, on top of the Q1 increase of $1bn, which comprised an extra 200k people to help clean stores, stack shelves and get online orders out of the door. In total the company has hired in excess of 500k people this year alone. Walmart has managed to sell Asda in the UK for £6.7bn, drawing a line under an area of the business that has struggled to keep pace with the ever-competitive nature of UK retail. Free cashflow year-to-date has increased $9.7bn to $16.4bn.

At the beginning of this year Walmart said it was moving into the fintech space with the creation of a new startup in partnership with Ribbit Capital. Ribbit Capital is one of the firms behind the Robinhood app which is so popular with retail investors, and which, it has been argued, has helped fuel the strong rally in US markets in recent months. Profits are expected to come in at $1.487c a share.

NatWest Group full-year results

Friday: It’s been a rollercoaster start for new CEO Alison Rose, as she looks to steer the rebadged bank into the next decade. Rose has done a good job of giving the bank a makeover and given the paintwork a bit of a buff up, but unless you fix what’s under the bonnet, you’re still left with the same old banger underneath.

In September last year, the NatWest share price hit fresh record lows, but has rebounded strongly to a post-pandemic high, as the prospect of a resumption of dividends and a decent set of quarterly numbers showed that the pessimism priced into NatWest’s share price was probably a little overdone. The past 12 months has been one of damage limitation, with the concerns about Brexit, along with the problems brought by the pandemic.

The bank set aside impairments of £801m in Q1, and an attributable profit of £288m, following that in Q2 with impairments of over £2bn, and Q3 of £254m. NatWest said it expects full-year impairments of between £3.5bn and £4.5bn, which could well fall in the middle of that range given the tighter lockdown restrictions that have been in place since November. On the wider concern regarding its margins, NatWest has the thinnest in the UK banking sector at 1.65%, so shareholders will be hoping for an improvement there, given how the yield curve has steepened over the last three months. Despite the rebound from its record lows in September the shares are still over 25% lower from where they started 2020. 

France and Germany flash PMI’s (February) 

Friday: It’s been clear for several months now that economic activity between the services sector and manufacturing sector has been chalk and cheese. The various lockdown restrictions that have been in place since October in both France and Germany has meant that the services part of both economies has really struggled. In France services has been in contraction for five months in succession, while in Germany it’s been four months. This period of contraction is set to continue in February with both countries well behind in their vaccination programs, and restrictions set to remain firmly in place.

With little prospect of restrictions being eased in the near term we can expect  further pain for services in February. With restaurants and bars in France set to remain closed until Easter it is hard to imagine a decent recovery any time soon, which means February is likely to be the sixth consecutive month of contraction Despite the positive vaccine news lifting the markets, it is clear that there will be no similar uptick in economic activity until  restrictions start to ease, perhaps sometime in the spring, and both countries get their vaccination act together. 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 retail sales (January)

Friday: Since the 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 the 5 November, with a decline of -3.8%. Much of the November decline was probably due to some pull forward effect to October, as consumers tried to do all their pre-Christmas shopping before the lockdown began.
 
The biggest drag to retail sales came from closing bars and restaurants which saw big declines in spending there, though as recent retail numbers have shown the boom in online and digital sales has helped compensate. In December we got a rebound of 0.3%, which was a little disappointing given the brief two week 'unlocking' at the beginning of the month, which saw consumers go on a pre-Christmas spending binge before restrictions were tightened again. With a new lockdown imposed in January, the outlook for the beginning of 2021 is likely to be on the weak side as consumers hunker down for the long haul towards Easter. With the Bank of England expecting a 4% contraction in Q1 due to the tighter restrictions, January retail sales could well give an early feel as to how consumers feel as 2021 gets under way. We also have the latest flash PMI’s for manufacturing and services which came in at 54.1 and 39.5 in January. 

UK public sector borrowing (January)

Friday: The success of the UK’s vaccine rollout program is increasing speculation around the timing of a paring back of the emergency measures that the UK government has been taking in helping to support the economy. It is no secret that Chancellor of the Exchequer Rishi Sunak would rather rein back the extraordinary support measures sooner rather than later, however it remains highly likely that it will be quite some time before normal service is resumed, with sectors such as hospitality not set return to pre-pandemic levels of activity until next year at the earliest. 

This focus on the public finances and the growing levels of public debt are certainly a concern, however it is also a distraction from the wider issues facing the UK economy. Borrowing is already at a post-war record, and that will continue to go higher, however with gilt yields still well below 1% long-term borrowing costs still remain very low. In December the government borrowed £33.4bn, and with the UK economy locked down for most of January, as well as the rest of Q1 this figure is set to move well above £300bn by year end, with expectations for around £20bn for January. This shouldn’t be a problem if the UK government behaves in a sensible fashion, given everyone else is in the same boat. The appetite for longer term debt appears resilient if last month’s 50-year French bond auction is any guide, after it received €59bn worth of bids.     

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 15 February Results
Liberty Global (UK) Q4
Medpace (US) Q4
NexTier Oilfield Solutions (US) Q4
Tuesday 16 February Results
Avis Budget (US) Q4
CVS Health (US) Q4
Denny's (US) Q4
Ecolab (US) Q4
La -Z - Boy (US) Q3
Palantir (US) Q4
RingCentral (US) Q4
Wednesday 17 February Results
British American Tobacco (UK) Full-year
Cheesecake Factory (US) Q4
EQT Corp (US) Q4
Fastly (US) Q4
Herbalife (US) Q4
Hilton Worldwide (US) Q4
Marathon Oil (US) Q4
Rio Tinto (UK) Full-year
Stamps.com (US) Q4
Twilio (US) Q4
Wingstop (US) Q4
Thursday 18 February Results
Barclays (UK) Full-year
Blue Apron (US) Q4
Dropbox (US) Q4
Hays (UK) Half-year
Jakks Pacific (US) Q4
Marriott International (US) Q4
Morningstar (US) Q4
Planet Fitness (US) Q4
Roku (US) Q4
Trade Desk (US) Q4
Walmart (US) Q4
Friday 19 February Results
AdvanSix (US) Q4
Barnes (US) Q4
NatWest (UK)

Full-year

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