It’s been an absolutely stellar session for markets in Europe today, driven higher by hopes of a new US stimulus plan.
President Trump’s recent executive orders are being used as a starting point baseline, including a possible capital gains tax cut, along with reports of a new coronavirus vaccine developed by Russian scientists, which is expected to go into full production in September.
The airline and travel sector has been one of the main beneficiaries of the vaccine reports, with IAG, Norwegian Air and Carnival all pushing higher.
We’ve also seen broad based gains from the auto sector in Germany, after car sales in China surged for the fourth month in a row, with July seeing a gain of 16% year on year, with electric vehicle sales rising 19%.
The FTSE 100 has also rallied strongly, hitting one week highs in the process, led by financials and oil and gas stocks, with the oil price pushing up close to its best levels since March, while airline stocks have also performed well on the back of possible progress on the vaccine front, with IAG leading the way. Among the best performers, BP and Royal Dutch Shell appear to have found themselves a short-term base, while the likes of HSBC, Standard Chartered and Barclays are also showing solid gains.
The latest numbers from Prudential appear to also have been well received by the market, after it announced its intention to IPO its stake in its US operation Jackson National. The company had already laid the groundwork for such a move in July, when it completed a $500m equity investment by Athene Life into its US business, as it looked to bolster its capital position. Having already divested its UK business, today’s move appears to be an attempt to focus its energies on its Africa and Asia markets, where it is believed that there is likely to be greater growth potential. This appears to be borne out by today's H1 numbers, where adjusted operating profit for the region showed a rise of 14%, with the US operations down by 19%. It should be remembered that the underperformance in the US was expected given the lockdown in Q2, while in Q1 Prudential said Asia sales had seen a 24% year-on-year fall.
Following on from yesterday’s numbers from Marriott, Holiday Inn and Crowne Plaza owner, IHG, also reported numbers that reinforced how badly the hotel sector has been hit by the various virus lockdowns. In June, management said they expected (RevPAR) to be down 75% year on year on the quarter and 52% down on the first half, and this was pretty much in line with expectations at -51.7%. Total revenue on the other hand came in short at $1.25bn, as it swung to a first half operating loss of $233m. Unsurprisingly management said they would not be paying an interim dividend, until they had a better idea of how the future outlook and recovery was likely to play out. The most significant improvements in the outlook were expected to show up in the greater China region, and this has turned out to be the case, with business there slowly returning to normal. With $2bn of liquidity still to draw on, management have said they are making good progress on delivering the $150m in cost savings, the bulk of which are set to be delivered by the end of this year.
It’s been a decent first half for Domino’s Pizza with sales up 5.5% to £628.9m in the six months to June. Profits on the other hand were slightly lower, down 4.6% to £47.6m, as higher costs weighed on margins. This shouldn’t have been a surprise in terms of costs given that for a while Dominos had to bear the higher costs of a delivery only service.
Bellway Homes also issued a trading update which showed the house builder completed fewer properties in 2020, due to the shutdowns that we saw in April. While completions fell to 7,522 from 10,892 the previous year, the company’s order book rose by over £500m to £1.76bn. The company didn’t provide any revenue or profit guidance, due to the ongoing uncertainties around the economic outlook and also declined to say when it would resume the dividend.
Cineworld shares have jumped sharply again today, in the wake of last week’s ruling by a US judge that overturned the rules that dictated the release of how films are released in the US. Since the 1950s Hollywood had a monopoly on how films could be produced, exhibited and distributed, a practice that has now had time called on it. This story appears to have taken on an added twist in that last week’s ruling could make the beleaguered cinema chain the subject of a takeover bid from a big Hollywood studio, according to recent speculation in a UK newspaper.
While it is true that Cineworld shares have taken a battering over the past 12 months, the main reason for the weakness, coronavirus concerns notwithstanding, is the level of the company’s debt, which along with its modernisation program has placed an enormous strain on its balance sheet. With footfall at record low levels, and likely to remain subdued, there are significant obstacles to a potential takeover, not least how to accurately predict future cash flow in a post Covid world.
The plunging gold price has seen the likes of Fresnillo and Polymetal sink to the bottom of the FTSE 100.
US market update
US markets continued where they left off last night with the S&P 500 seemingly intent on retesting its previous record highs from earlier this year, as investors mull the prospect of a US capital gains tax cut, along with other stimulus measures, as Democrats and Republican politicians continue to bicker on Capitol Hill.
Stocks also got a lift after Russia claimed to have developed a vaccine for Covid-19, which President Putin said he had given to his daughter. While it is easy to get carried away with the prospect of a vaccine, the speed at which it has been completed is a little concerning, given that there is little data on any possible long term side effects.
Airline and other travel stocks have been the main beneficiaries from the vaccine reports, with American Airlines and Air Canada doing well, though there is some scepticism that the vaccine will be available quickly, and even if it is whether it will be safe.
The Nasdaq, on the other hand appears to be struggling at these elevated levels, and appears to be trading more like a safe haven trade, with money flowing out and rotating into the more cyclical areas of the market.
The pound has shrugged off the latest unemployment numbers from the UK. While the headline rates have remained fairly steady, there is an underlying current of worry that the true cost of the pandemic has yet to be realised given the millions of people still on furlough and who could well lose their jobs by October, if the scheme is withdrawn before the economy has got back on its feet.
The euro has been a little perkier after the latest German ZEW survey saw a jump to 71.5 in August, however while expectations are soaring current conditions were much worse than expected falling back to -81.3. This divergence between expectations and current assessment is a real concern with the gap close to levels last seen at the beginning of the century, when Germany was implementing the Hartz reforms.
The Japanese yen is the worst performer sinking against the US dollar, on the back of firmer US yields, and a bullish stock market, which in turn has helped undermine the gold price.
The strong run higher in the gold price, appears to have come to a shuddering halt in the last couple of days, with the potential for further falls in the short to medium term. It’s important to remember, despite today’s falls, that we’ve come a long way in the last nine weeks, and we are well overdue a correction. This appears to be what we are getting with equities getting a strong bid, and yields ticking higher.
Oil prices are taking their cues from the firmer tone for stock markets and demand out of Asia, as well as hopes that US policymakers will eventually do the right thing and agree on some form of fiscal package. Brent prices also appear to be closing in on the 200 day moving average, which could act as some form of resistance on a short-term basis.