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Turnaround Tuesday sees banks outperform, Unicredit slides

Turnaround Tuesday sees banks outperform, Unicredit slides

After some month-end profit-taking pushed markets lower to round off an impressive November performance for equities, normal service has resumed in Asia this morning, with the China recovery story taking centre stage, helping to push the Nikkei 225 to another 29-year high and its best close since 1991.

We may also be seeing a delayed reaction to yesterday’s Moderna news about seeking emergency approval of its own Covid vaccine, the effects of which may have got lost in some end of month portfolio re-adjustments.

It has taken several months, with China unlocking its economy at around the same time that Europe and the US had to lock down theirs, but in the last two to three months there have been signs of life that, barring a second wave, the Chinese economy is starting to attain escape velocity. As an added bonus, the Chinese consumer also appears to be rediscovering confidence. This morning the latest Caixin manufacturing PMI survey for November saw the index hit a 10-year high of 54.9, confirming a similar pattern in the official numbers which came out yesterday, along with a strong services component, something that is currently lacking in Europe and the US due to a second wave of coronavirus infections, which China has been much more successful in managing to avoid. 

Markets here in Europe have picked up the Asia baton, pushing strongly higher on the open, driven largely by financials, as well as the oil and gas sector. Housebuilders are enjoying some strong gains after the latest Nationwide house price data showed an annual 6.5% gain in house prices. Coming off the back of a 13-year high in mortgage approvals yesterday, it is clear that demand for housing remains resilient, providing a decent boost to banks as well, as higher asset prices reduce the pressure on any impairment provisions. It is therefore not surprising that the best performers are Barclays, Lloyds and NatWest, as are the two biggest housebuilders in Taylor Wimpey and Berkeley Group. Rolls-Royce and International Consolidated Airlines Group are also doing well.

Manufacturing is one area that has managed to absorb the worst effects of the tighter restrictions during these second lockdowns, a pattern that has also been borne out by the numbers here in Europe. As such they should act as a decent counterbalance to the services sector which is expected to see some really poor numbers later this week. The recent flash PMI numbers from Germany and France were a bit of a contrast, with France manufacturing weakening slightly to 49.1, while German manufacturing remained strong at 57.9, despite rising infection rates across Europe. These were confirmed at 49.6 and 57.8. The biggest concerns are around the likes of Spain and Italy which has seen their respective economies hit hardest by the pandemic. Today’s manufacturing numbers for November were not encouraging in that regard, coming in at 49.8 and 51.5 respectively.

The retail sector has remained in focus this morning after confirmation that the Arcadia group has collapsed into administration, potentially putting at risk up to 13,000 jobs as buyers are sought for the likes of Topman, Topshop and Dorothy Perkins. JD Sports, who were reported to be looking to buy into Debenhams, appear to have cooled their interest in this regard, and may decide not to pursue this particular avenue, given that Debenhams stores had a number of Dorothy Perkins and Miss Selfridge concessions within them. This could put Frasers Group back in play for the Debenhams group. Mike Ashley has never hidden his desire in trying to get his hands on the group, only to be thwarted at various turns. With 12,000 Debenhams staff set to lose their jobs in the event of no rescue, you would think that something might be agreed, even if it meant that only some of the jobs could be saved.

Italian lender Unicredit's share price has slid over 7%, after its CEO Jean-Claude Mustier, who has been at the forefront of the bank's turnaround strategy over the last few years and put the bank on a much sounder footing, stepped down over disagreements over the bank's future strategy, particular with regards to M&A. This is a huge blow to the bank, and in particular raises concerns over its governance and decision-making processes. There has been speculation that the Italian government were trying to get Unicredit to buy Monte Dei Paschi, a bank that has been in trouble for years now, and whose balance sheet problems are a huge unknown. In its last statement in November, Monte Dei Paschi said it expected its capital buffers to fall below the regulatory minimum, but it didn’t say how big the actual deficit was. No self-respecting banker or CEO will embark on a deal without knowing the forensic detail of what lies on the books of a bank, where transparency has traditionally been a problem.

It’s been a long hard road back to sustainability for Unicredit, as the bank had to raise new capital four times over the last 10 years, so putting that sustainability at risk because the Italian government wants to offload its two-thirds stake is a huge ask, and it appears that Jean Claude Mustier feels that it is a risk too far, hence his departure. While there is no question that the Italian banking sector is in dire need of consolidation, it should not be done at any price, and there are significant concerns about what could be hiding beneath the hood when it comes to Monte Dei Paschi. If the financial crisis has taught us anything, it’s that a deal done in haste, generally causes plenty of reasons to repent, a lesson RBS found out when it acquired ABN Amro. 

Oil prices have remained steady after Opec+ failed to reach an agreement to extend the production cuts beyond January next year. The US dollar has continued to slide, with the pound hitting is highest level since September, above 1.3400, despite various reports suggesting that an EU-UK agreement still seems some way off with respect to fishing.

US markets look set to carry on the positive tone from markets in Asia and Europe, with a similarly strong open. The main focus is likely to be on the latest ISM manufacturing report for November, as well as the latest testimony of Fed chairman Jerome Powell to US lawmakers, where he is once again expected to paint a picture of a US economy hugely vulnerable to rising Covid-19 infection rates, while also urging US lawmakers to put aside their differences and agree some form of fiscal stimulus.

Salesforce's recent numbers have shown the company hasn’t been hurt by the shift to working from home, despite being mostly geared towards office working. In August the company reported a big jump in Q2 earnings to $5.15bn, while earnings per share rose to $1.44 a share, well above the $0.67 estimates. As a result, the company revised its full-year revenue target up to $20.8bn, as well as revising up its profit estimates.

The company cited its new Work.com product, which helps aid clients in the transition to remote working, and it has also benefited to a certain extent from its elevation into the Dow, which has seen its shares hit a record high in early September. Profits for the current quarter are expected to come in at $0.748 a share, which seems a bit on the low side given the outperformance in Q2. Salesforce also announced last week it was in talks to buy Slack Technologies, in an attempt to take on Microsoft which offers a similar tool with its Teams offering. A deal could be announced in the coming days.