The past few hours of trading have been muted as there has been little in the way of big macro-economic news to influence sentiment.

Europe

As we approach the end of the trading session, the major equity benchmarks of Europe are showing modest gains, while the DAX 30 is underperforming. There were plenty of corporate stories today, but the lack of a deal between Republicans and Democrats in relation to the $1 trillion Covid-19 pandemic package has kept sentiment at bay. The relationship between the US and China has come under extra pressure as President Trump has banned TikTok in the US, and Microsoft are looking to acquire the group’s US unit. The Chinese government feel the Trump administration is giving a US company the greenlight to pick-off the business. Dealers are cautious that Beijing will strike back in some shape or form.      

EasyJetshares have soared today as it raised its outlook for the fourth quarter – the airline now plans to operate at 40% of its capacity, and the previous guidance was for 30% capacity. The company still expects to post a loss in the fourth quarter, but the loss will be smaller than previously anticipated, so easyJet is heading in the right direction. Demand for flights recently has been stronger than expected and the load factor in July was 84%. Not surprisingly, the airline had a dreadful performance in the third quarter as the pandemic wreaked havoc on the industry. The headline loss before tax was £324.5 million. The cash burn in the three month period was £774 million but keep in mind the forecast was £1 billion. The more optimistic outlook form the group has boosted the stock price, but the acid test will be whether demand holds up too.

After much speculation, BP finally cut its dividend. The second quarter dividend will be 5.25 cents, down from 10.5 cents. Royal Dutch Shell, who are in a much stronger position than BP, cut their dividend in late April. Since that announcement was made, there was serious speculation that BP would follow suit. Today, BP confirmed that its quarterly underlying replacement cost loss was $6.7 billion, and analysts were expecting the loss to be $6.8 billion. The oil giant intends to cut costs and slim down in an effort to become leaner. It received $1.1 billion from disposals in the quarter. At the end of June, the net debt position stood at $40.9 billion, which was a 12% drop on the year. Cutting back on debt is an important step in becoming more nimble, and it will probably be a long process.

Direct Line announced an interim dividend of 7.4p, up from 7.2p from one year ago. The pay-out will rise even though first half operating profit dropped by 3.4% to £264.9. Gross written premium ticked up to £1.58 billion. Within the insurance sector, the operating ratio is a closely watched profitability metric. Direct Line reiterated its guidance of achieving a combined operating ratio of 93-95% in 2021.

Diageo shares have taken a knock today as the company said it wasn’t able to issue a guidance on account of the volatility surrounding the Covid-19 crisis. Full year reported net sales dropped by 8.7% to £11.8 billion, while operating profit fell by just over 47%. In a bid to conserve cash, it decided to pause its share buyback programme. The final dividend was 42.47p, unchanged from the same time last year. The total dividend was 69.88p, an increase of 2% on an annual basis. The fact the yearly dividend rose slightly suggests the company is still reasonably confident in its outlook even though the language was a bit more cautious.  

Melrose, has agreed to new and improved terms for its banking covenants. It has a committed revolving credit facility of £3.2 billion that is payable in January 2023.  

Babcock International shares have dropped to a level last seen since 2006 as the group revealed a 40% fall in first quarter profit. Higher costs, connected to Covid-19, impacted the bottom line. 

Yesterday, BT shares fell to their lowest level since 2009, and today they have rebounded thanks to an upgrade from Berneberg. 

US

The mood is subdued on Wall Street and the S&P 500 is only a touch higher. The reporting season is a little quiet now and politics has taken centre stage. Traders are a tad hopeful that a deal will be reached and the $1 trillion stimulus package will be signed-off. It is almost as if some traders are waiting in the wings, and are eagerly awaiting the confirmation of the news before buying into the market.      

Microsoft is in talks to purchase TikTok, the video-sharing app, which is owned by the Chinese company ByteDance. On the grounds of national security, President Trump stated his intention to ban the app in the US as he is concerned about data sharing. The US leader said he would approve Microsoft’s takeover of the group provided the US Treasury received a cut from the sale price. Such a proposition is highly unusual.  

Google’s parent, Alphabet, raised $10 billion from a debt issue. The tech giant is clearly taking advantage of the depressed yield environment as the five year bond will pay a coupon rate of 0.45%. It is a record bond issue in terms of size, and that could pave the way for an acquisition spree or perhaps a round of major investment in research and development. 

Nikola, the electric and hydrogen-powered truck manufacturer, will post its second quarter earnings after the close of trading tonight. Yesterday, Deutsche Bank, added the stock to its buy list ahead of the earnings update. Nikola shares saw a huge amount of volatility last month as some traders feel it could go down the same route as Tesla in terms of share price action.   

FX

The US dollar index is now flat after being in positive territory. It is worth noting the currency fell to its lowest level in over two years at the back end of last week. Part of the reason for its recent weakness was the Fed’s update that it will keep monetary policy loose to support the economy. Currency dealers seem to be hopeful that US politicians will eventually reach an agreement in relation to the $1 trillion package.

EUR/USD is fractionally higher seeing as the dollar gave up its earlier gains. The eurozone PPI rate in June was -3.7%, which was an improvement from the -5% registered in May. The increase in the rate could be a product of firmer commodity prices, such as oil, but there has been evidence of a rise in demand as economies have reopened. There were no major economic announcements from the UK today, so GBP/USD has been hit by the dollar.  

The Reserve Bank of Australia kept rates on hold and it reiterated the view that it will do what is required to help the economy. The update wasn’t a surprise but it helped the AUD/USD recover some of the ground that it lost in the previous two sessions.     

Commodities

Gold has lacked volatility for much of the session but the reversal of the positive move in the dollar has lifted the metal. Once again, the inverse relationship between gold and the greenback has helped the commodity. A fresh record has been achieved and it is close to the $2,000 mark.        

WTI and Brent have seen a turnaround in sentiment. The energy market was in the red until it staged a sharp move higher over two hours ago. It is worth remembering the energy market gained ground yesterday on the back of well-received manufacturing reports from China, Europe and the US. While Brent crude oil and WTI remain above their respective 50-day moving averages, the wider bullish trends should remain intact.  


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