Despite starting the week on the back foot, due to concerns over a second wave of infections in China, Japan, India, as well as a number of US states, equity markets have managed to stabilise after the losses of last week, with markets in Asia managing to finish the week modestly higher.
The rise in infection rates over the past two weeks has increased the levels of uncertainty as to the effect this might have on any recovery and whether it will be v-shaped, as markets appear to be currently pricing, or whether it will be a much longer u-shaped type of rebound. Despite these concerns markets here in Europe have opened higher, after China said it plans to accelerate the purchases of US farm goods as it looks to comply with the phase one of its recently completed phase one trade deal with the US.
EU leaders are also getting together by videoconference to open negotiations over their proposed €750bn recovery plan, in an attempt to get the more fiscally conservative nations of the Netherlands, Austria, Denmark and Sweden on board. These four countries have been pushing back quite hard at the prospect of there being no conditionality attached to the €500bn of grant money. It is unlikely that there will be any quick agreement here despite German chancellor Angela Merkel’s plea for European countries to show more solidarity.
Early gainers did include the owner of British Airways, International Consolidated Airlines as it announces the resumption of its Iberia long haul flights from July, however the gains proved to be somewhat short lived. Shell and BP are also slightly higher on a firmer oil price.
Engineering group John Wood Group updated shareholders with its latest H1 numbers. Revenues came in at $4.1bn, a decline of around 11%, adjusting for the disposals of nuclear and industrial services business in Q1, with operating profits coming in between $80m and $90m. In terms of the order book, that fell 11% from the end of last year, to $7bn, with $3.5bn of that due to be delivered by the end of this year, while net debt also came in lower, as the company focussed on reducing costs, and underpinning its balance sheet.
Wirecard shares are down sharply again in Frankfurt as the controversy around the missing €1.9bn rumbles on, and the company suspends its COO Jan Marsalek. The controversy also calls in question the behaviour of the German regulator Bafin which went to great lengths to defend the company, when initial questions over its governance were first raised a few months ago.
The pound has rebounded a touch after yesterday’s declines, benefitting from the slightly more positive mood on equity markets. It has been notable in recent weeks, that the pound has been a proxy for risk, doing well when equity markets are rising, and underperforming when equity markets have come under pressure.
Yesterday the Bank of England surprised the markets by not being as bearish on the UK economic outlook as many expected it would be. This slightly more positive tone seems a little at odds with recent economic data and while today’s record-breaking rebound of 12% in retail sales for May is welcome, it can’t disguise the fact that the UK consumer has become much more cautious in recent months.
Not surprisingly, retail sales in April were a shocker, with a record decline of 18%, with the economy locked down for all of the month. Coming on the back of a 5.2% decline in March, and a weak February, it is clear that consumers have been holding back for several months, and could well continue to do so for some months to come, despite today’s May rebound. Much of the rebound in sales was driven by a strong increase of 42% in household goods stores as DIY shops re-opened, as the sunny weather in May brought people out in droves, while the amount spent on-line rose to a record 33.4%, as a proportion of sales.
While today’s rebound is welcome after the declines of recent months, it is still some way short of the type of rebound seen in the US, which was V-shaped in its intensity. Overall retail sales are still down a record 12.8% for the three months to May, with only food sales and non-store retailing seeing an increase, with consumers expected to remain fairly cautious for a while yet.
We’ve already seen in the latest consumer credit numbers that consumers are paying down debt rapidly, and this is unlikely to change soon. Furloughed employees will be in no rush to go out spending, due to uncertainty over when they might return, and with holidays this year likely to be difficult to do, consumers are likely to find the room for discretionary spending quite limited.
The latest public sector numbers for May rose another £54.5bn on top of the £47.8bn seen in April. In the space of the last two months the UK has borrowed almost as much as in the previous two years, with the UK Treasury paying the salaries of over 8m private sector workers. At some point the UK government will have to look at how they intend to pay for all of this, but for now with 10-year yields at 0.2% it isn’t something they need to be too concerned about right now.
Crude oil prices are also on the rise again, after Iraq and Kazakhstan promised to compensate for their failure to meet their production commitments in May.
US markets look set to open higher, though volatility is likely to be high due to quadruple witching likely to force a lot of liquidations, particularly since a lot of retail traders have got involved in the recent rebound through the Robinhood trading app.