Another positive session for US markets last night, with new record highs for Amazon and Facebook, gave way to a rather mixed Asia session this morning as investors wrestle with the dilemma of a rise in infection rates as various economies start to ease their lockdowns.
While tech shares help to drive the rebound in stock markets in the US, markets in Asia, as well as here in Europe are struggling to find similar catalysts to help drive their own rebounds, even though by and large it has been a positive week so far for markets here in Europe. For all of the underlying optimism that the worst is over in the short term, as we head into the heat of the European summer months, and the talk of holiday destinations reopening from 1 July, there is some concern that a second wave is only a matter of time. This may help explain why for all the resilience seen this week European markets have still been unable to move beyond the peaks we saw at the end of April, and why we have opened lower this morning.
In company news, Whitbread released their latest full-year numbers today, after delaying them in the wake of the announcement of the lockdown, after the company was forced to close all of its hotels in the last week of March. As far as the numbers are concerned, trading in the second half saw an improvement in the UK, while in Germany the growth in the hotel network there saw capacity grow to 9,800 rooms, across 52 hotels.
Full-year revenues rose to £2.07bn, while statutory profits for the year rose by 23.2% to £218m. In light of recent events however, none of these figures matter as much as when the company can reopen its hotel network. In the UK all but 39 of its hotels remain closed, with the assumption that they will have fairly low occupancy until September, however in Germany their hotels have already reopened, back on 11 May.
To bolster the balance sheet, management took the decision to suspend the remaining dividend, as well as getting 18-month covenant waivers from the banks. Some 27,000 staff currently remain on full pay, with the help of the government furlough scheme, ready to return as soon as the government signals the green light to reopen. Whitbread also announced their intention to launch a 1 for 2 £1bn rights issue to help drive future investment and growth in both the UK and Germany, as well as help replace some of the £600m outflow it has seen as a result of the pandemic.
Whitbread share price falls sharply
In terms of the outlook, there was no guidance provided given the current uncertainty, however a window was offered in terms of the impact to the business in the 11-week period to 14 May. Total accommodation revenues were down 75%, and down 99% in the last seven weeks. Market reaction to the rights issue has been predictably negative, with Whitbread shares sharply lower, and while no shareholder likes to have to put their hands in their pockets there is a certain logic to be had with the raising of this extra cash. With UK holidaymakers unable or unwilling to travel abroad Whitbread has the perfect opportunity to take advantage of a big increase in staycations as a result of the pandemic. This extra cash could be enormously helpful in precipitating that.
AstraZeneca is also in the news after receiving $1bn in US funding to develop a vaccine for the University of Oxford and expects to start supplying doses as early as September.
Germany’s state carrier Lufthansa looks set to be close to a €9bn bailout deal from the German government, something that is likely to reenergise Ryanair’s Michael O’Leary’s claims that the EU’s biggest economy is once again playing fast and loose with state aid rules. Easyjet shares are slightly higher after the airline announced that it would be resuming some flights from 15 June, though it’s not immediately clear what demand if any there will be for them, until lockdown measures are eased further.
The euro has undergone a bit of a renaissance in recent days, helped in no small part by the agreement between France and Germany with respect to a €500bn recovery fund. A modest improvement in the latest manufacturing and services flash PMIs is also helping though they would have struggled to be much worse than the April numbers. Services in France in particular saw a decent rebound as lockdowns were eased, from a record 10.2 in April to 29.4, however the numbers still point to an awful contraction in Q2. Germanys flash numbers also saw similar improvements, with services also better than expected, but again they are still pretty rubbish, just not as bad as expected.
Sterling under pressure
The pound has remained under pressure this week, on two fronts. Firstly over a lack of progress in Brexit talks, and secondly after Bank of England governor Andrew Bailey indicated he was reconsidering the central banks approach on negative rates. We saw a number of headlines yesterday after the UK government sold its first bonds with a negative rate, selling three-year bonds at an average rate of -0.003%. This quite rightly received a number of headlines, however it shouldn’t really have been that much of a surprise, given that UK 2-year yields have been negative for nearly a week now.
Speculation about negative rates has increased mainly due to yesterday’s sharp fall in the headline CPI rate in April from 1.5% to 0.8%, prompting some shrieks of anguish that the Bank of England risks consistently falling short of its inflation target. This seems unlikely given that in the wake of the pandemic prices in the shops are already starting to rise, as anyone who has been in a supermarket recently will tell you. The biggest drag on inflation was energy prices and we all know why they have fallen while struggling retailers have slashed the prices on their unsold stock inventory in an attempt to shift it. Neither of these factors is likely to last, and in the words of every central banker who resists raising rates when inflation is rising, is likely to be transitory.
Maybe our esteemed central bankers might do well to get out of the ivory towers of Threadneedle Street more, and see what is happening in the real economy before hypothesising over the risks of deflation. If negative rates were the answer Japan would have managed to get itself out of the deflationary slump it has been in for the last 20 years or so. The latest flash PMIs for May for manufacturing and services are expected to show modest improvements, however its still a matter of degree in terms of how bad they will be.
US markets look set to take their cues from the weakness being seen in European trading this morning. Earnings numbers continue to come thick and fast and this time it’s the turn of chip maker Nvidia, which has been another area that has done well over the past few weeks, and been a key growth area for investors. Nvidia has seen its shares hit record highs this month. While most people know the company for its high-performance graphics chips the company also has a decent data centre business. In terms of its gaming business, we could see a slowdown if consumer confidence takes a while to recover. This is because while video game demand might increase, gaming console demand might slow, given they are expensive bits of kit. This could make the share price vulnerable to a pull back if this week’s update falls short in any areas.
On the data front we can expect to see similar improvements in the latest flash manufacturing and services PMI numbers for May, however they are still expected to point to a Q2 contraction for the US economy with numbers below 40 on both measures. Weekly jobless claims are also expected to remain in the multimillion bracket, albeit rising at a slower rate than previous weeks. After last week's move below 3m, we can expect to see another 2.4m added to the list, pushing the total above 36m and closer to the 40m mark, which it could well reach next week.